It was the best of years (maybe) for the Top 5 in �07

While they hadn�t yet crunched fourth quarter numbers as this issue went to press, most market researchers agree that 2007 was a great year for optical systems companies. Even as early as the second quarter, Infonetics Research (www.infonetics.com) suggested that 2007 would be the best year for the optical systems market since 2001. That�s right before the bubble burst, for those of you who have wiped that period from your memories or joined this industry after stories of that time had passed into myth.

This good fortune took its time trickling down to the components and subsystems level, however. �Inventory corrections� limited growth through the first half of 2007, although it appears a bit of sunlight may have shone on the space in the latter half of the year.

All of which means that when it came to our annual attempt to crown the Top 5 companies in the systems and component/subsystems markets, the criteria for success proved a bit different between the two arenas. Sure, having a large market share is important but, as usual, we on the Lightwave editorial staff don�t believe that is all that�s necessary to be a market leader. Our top companies helped shape the market as well as extracted money from it, whether through innovative product announcements, doing something about consolidation instead of just wishing for it, or (in the case of the component/subsystem niche, where the bar for this sort of thing is lower) flirting with profitability.

We don�t imagine everyone will agree with our rankings, which is why we�ll have an area on our blog where you can tell us where we went right or wrong. Check it out at www.pennwellblogs.com/lw.

Last year in this space, we suggested that the optical component and subsystems suppliers were reporting that the market had turned a corner. Carriers were now interested in new solutions to their opex problems, which meant a willingness to pay a bit more for a new generation of products rather than focusing exclusively on another round of price reductions on yesterday�s technology.

Component/subsystem vendors may indeed have turned a corner in 2007�and, as mentioned previously, then ran smack into another wall, at least in the first half of the year. Nevertheless, some companies made aggressive moves to expand into new areas or improve market share through acquisition. Oplink (www.oplink.com) acquired Optical Communication Products and moved within Ovum RHK�s Top 10 list of vendors for the four quarters beginning with Q406. Luminent�s acquisition of Fiberxon to create Source Photonics (www.sourcephotonics.com) had the same effect. And Emcore�s (www.emcore.com) acquisition of Opticomm in April and the telecom portions of Intel�s Optical Platform Division (www.intel.com) in December may produce a similar result once the latter deal closes.

These moves, while laudable in terms of accelerating the segment�s much needed move toward consolidation, weren�t quite enough to gain them entrée into Lightwave�s Top 5 Vendors. Several companies in our Top 5 for 2007 also buttressed their positions with acquisitions; all maintained their positions as market share leaders, if not the same share of the market they had last year.

For example, JDSU (www.jdsu.com) earns our top spot by retaining its market share lead. That lead slipped a bit, both in terms of raw numbers (12.4% of Ovum RHK�s most recent rolling four-quarters market share estimates, compared with 14.3% at the same time the previous year) and the gap between it and the second-leading vendor. However, it wasn�t due to a lack of initiative on the company�s part.

In the acquisition arena, JDSU snapped up datacom and VCSEL expert Picolight in May of last year for approximately $115 million in stock (and its recent acquisition of Westover Scientific�s Fiber Optic Division indicates it plans to remain aggressive this year). The company also partnered with Mintera Corp. to strengthen its hand in the emerging 40-Gbit/sec market and provide a pathway to 100 Gbits/sec; the partnership included an investment in the high-speed transmission technology firm.

Ovum RHK reported that the company saw its sales decline 3% sequentially in the first quarter of calendar 2007 and another 12% the following quarter. However, it reported quarter-on-quarter revenue increases in both its optical communications and advanced optical technologies segments in its fiscal first quarter, which coincides with the third calendar quarter of 2007.

Finisar, our No. 2 company, experienced a year similar to JDSU�s, although it didn�t slip as much in terms of market share (9.4% after Q3 of 2007, versus 10.5% after Q3 of 2006). As a result, the company actually gained on JDSU, closing its gap from 3.8% to 3.0%. The fact that the company upped revenues 9% sequentially in the second quarter of calendar 2007 undoubtedly helped. It also scored the highest in our reader survey for �mind share� among transceiver/transponder vendors.

The company also announced at OFC/NFOEC in March that it had purchased Kodeos and Azna. The two firms specialized in dispersion-tolerant transmission technology, which should position Finisar to offer products at 10 and 40 Gbits/sec as well as make a play when 100G goes mainstream.

The company didn�t end 2007 on a positive note, however. Its Q2 fiscal 2008, which ended last October 28, showed a downward revenue trend from both the previous quarter and the same quarter of the prior year. Finisar cited several internal issues related to redesigns and supplier hiccups, as well as excess SAN transceiver inventory at a major customer, as the reasons for the disappointing results. Chairman, president, and CEO Jerry Rawls underscored the shortfall was not due to a softening in overall customer demand.

No. 3 vendor Sumitomo (www.sumitomo.com) earns its ranking based on its ability to maintain its share year on year at 8.4%. The company has its fingers in many areas of the optical communications components, subsystems, and fiber markets through a variety of subsidiaries that often have subsidiaries themselves. For example Sumitomo Electric Industries (www.sei.co.jp) does business in the U.S. under the names ExceLight Communications (for transceivers; www.excelight.com) and Sumitomo Electric Lightwave (for cabling, splicers, and related products; www.sel-rtp.com). Meanwhile, a subsidiary with the unlikely name of Sumitomo Osaka Cement (www.soc.co.jp) offers a line of lithium niobate modulators, including devices for 40-Gbit/sec applications. Sumitomo markets its component, subsystem, and cabling products primarily in Asia and North America.

The company didn�t announce any acquisitions this past year. However, it did reveal in February of last year that it has shipped 10 million laser diodes since 1991. It also launched production of SFP+ transceivers and a new line of 2.5-Gbit/sec SFP DWDM devices. It also helped launch a multisource agreement for 40-Gbit/sec transmitters and receivers.

Opnext (www.opnext.com) repeats as our No. 4 company, thanks to a strong gain in market share that thrust it into the fourth spot in Ovum RHK�s rankings. It also successfully launched an IPO. Unfortunately, at press time its shares were trading at less than a third of the value they had attained on their first day of trading, which is the primary factor that limits them from being higher on our list. Having to preannounce earnings below guidance for the quarter ending Dec. 31, 2007 (its fiscal third quarter), didn�t help its case, either.

However, the company expects better revenues in its fiscal fourth quarter, which should restore the luster it had through most of 2007. The third fiscal quarter bump likely will end a string of five consecutive quarters of increased profitability, and its expected numbers in that quarter would still surpass what it made during the same quarter of 2006. The company announced in December its 10-Gbit/sec transceiver shipments had reach 500,000, after announcing it had reached 250,000 earlier in the year. Meanwhile, it is positioning itself as a player in long-reach 40-Gbit/sec applications.

Our fifth and final spot goes to Avago Technologies (www.avagotech.com). While doubt has been cast in previous editions of our Top 5 rankings about the longevity of the company�s commitment to the optical communications space, Avago continues to build on its strength in the datacom niche. While the company no longer provides separate sales figures for its optical communications activities in the wake of its spinoff from Agilent, Daryl Inniss at Ovum RHK estimates that Avago�s total market share might be the third or fourth highest in the industry.

The company has been particularly aggressive in Fibre Channel, offering the industry�s first 8-Gbit/sec SFP transceiver in December. In the Ethernet world, it announced a 10GBase-LRM device in an X2 form factor in May. However, it hasn�t focused on datacom exclusively. A new optical transceiver specifically targeted at the wireless base station market, unveiled at ECOC, provides one such example. The company also acquired Infineon�s plastic optical fiber business. Its 10-Gbit/sec VCSEL technology also achieved Telcordia GR-468-CORE qualification.

So why didn�t Avago rank higher? The fuzziness on its sales figures provided some doubt in our minds, as did the fact that the company appears to have something of an identity crisis within the market. Our transceiver survey showed that readers overwhelmingly think of Agilent when they think of the company�s product line, which indicates that the company still has branding issues that it has yet to overcome.

By all accounts, 2007 marked a banner year for the optical networking market, which earned its highest revenues since the crash in 2001. According to Ovum RHK analysts, annualized spending was just north of $13 billion in 2007, and they expect that number to climb to $14 billion this year. Dell�Oro Group (www.delloro.com) analysts say the bulk of this new spend is coming from telecom service providers in Europe, the Middle East, and Africa (EMEA).

Certainly on the system level, the industry had much to be bullish about in 2007, including the birth of the packet optical network platform (PONP) market, which Heavy Reading�s (www.heavyreading.com) Sterling Perrin believes will net $144 million by the end of the year�up from essentially no revenue in 2007. The Carrier Ethernet market also proved solid in 2007 and looks to be strong for the foreseeable future. Infonetics Research analysts expect the metro Ethernet market to double between 2006 and 2010, when it will reach $18.8 billion.

There are some lingering uncertainties. Market consolidation in 2006 resulted in the formation of several so-called mega-vendors, including Alcatel-Lucent, Nokia Siemens Networks, and Ericsson (Marconi). While consolidation itself has been viewed as a healthy development, these vendors have struggled to integrate staff and product lines. Of the mega-vendors, only Alcatel-Lucent lands on our top five list, though it too has had its share of post-merger woes. While it�s a bit premature to judge the success of these combined entities, early returns suggest that bigger is not always better.

Despite such merger headaches and executive shakeups, Alcatel-Lucent (www.alcatel-lucent.com) once again tops our list for one simple reason: You just can�t argue with the numbers. Ovum RHK places the mega-vendor at the top of its rolling four-quarter list with a 23.1% worldwide market share. Its next closest competitor�Huawei�holds 12.8% of the market. Says Michael Howard, principal analyst at Infonetics Research, �Perennial No. 1 Alcatel-Lucent posted a 17% sequential gain in revenue in the third quarter, following a 23% gain in the second.� Moreover, he says, �Alcatel-Lucent is up 26% from Alcatel�s and Lucent�s combined revenue totals a year ago in the third quarter of 2006, before they merged.�

Within North America, Alcatel-Lucent has secured coveted GPON contracts with both Verizon and AT&T, and its list of worldwide customers is impressive. In 2007, the company inked GPON contracts with French alternative provider Neuf Cegetel, Norwegian service provider Telenor, Iceland�s Simmin, and Hong Kong Broadband Network Ltd.

The company�s $79 million deal with the East Africa Marine System Ltd. was one of several submarine optical networking contracts it landed in 2007. Finally, its array of post-deadline papers at OFC/NFOEC and ECOC on the subject of 100-Gigabit Ethernet transport�not to mention its 100G trial with Verizon�suggests that Alcatel-Lucent also is positioning itself to nab a sizeable chunk of this market when the standards are complete.

Nortel (www.nortel.com) coasts into the No. 2 spot on our list on the strength of its Ethernet initiatives, particularly around Provider Backbone Transport (PBT) technology. During its November 2007 investment meeting, the vendor revealed that since its PBT win with BT last year, it has secured more than 30 Carrier Ethernet contracts worldwide. �In 2008 and beyond, we�ll focus on increasing our customer momentum and evolving our PBT offering,� said Philippe Morin, Nortel�s president of metro Ethernet networks.

Nortel capped the year with a nice win at Verizon; the company is providing its OME 6500 next-generation optical convergence platform to support 10- and 40-Gbit/sec services across Verizon�s pan-European ultralong-haul network. Speaking of the OME 6500, Nortel made several key enhancements to the product line, including the addition of ROADM capabilities. According to Infonetics Research, the company is now No. 3 in worldwide metro WDM sales.

Fujitsu (http://us.fujitsu.com) slides into the No. 3 spot on our list, up from its fifth place last year. Fujitsu may not have been the first to market with a PONP, but its introduction this year of the FLASHWAVE 9500 seems to have initiated the current buzz surrounding the market. At press time, Fujitsu was rumored to have won Verizon�s packet optical transport platform RFP, besting both Tellabs and Nortel in the process. Moreover, the company beat all comers for a $1.5 billion submarine optical networking contract from FLAG Telecom to deploy an additional 50,000 km of submarine cable in four systems around the world. And Fujitsu inked enough contracts with its FLASHWAVE 7500 ROADM product to capture the No. 3 spot on Infonetics� worldwide metro ROADM vendors list.

Our No. 4 pick, Huawei (www.huawei.com), makes the top five on nearly every analyst�s list�Ovum RHK places them second in worldwide market share at 12.8%�despite doing virtually no business in North America. That means it�s doing a lot of business in Asia�most notably China�and Europe. Infonetics ranks the company No. 2 in metro ROADM sales worldwide, and sales of its access equipment seem strong. The vendor inked a contract with British Telecom in 2006 to supply access equipment for the carrier�s 21st Century Network initiative; Huawei is believed to be BT�s GPON provider. Huawei also announced a new venture, Huawei Submarine Networks Ltd., in collaboration with Global Marine Systems Inc. Earlier in the year, Hibernia Atlantic tapped Huawei to provide equipment for its 40-Gbit/sec subsea span between Boston and Halifax, Nova Scotia.

Ovum RHK ranks Tellabs (www.tellabs.com) fifth on its rolling four-quarter worldwide list with a 6% market share, and that�s exactly where the company lands on our list this year. Among the high points for Tellabs is its ROADM strategy; Infonetics Research ranked the company number one in worldwide metro ROADM technology this year following record gains from its Verizon contract. The carrier is deploying Tellabs� 7100 platform to support FiOS video services.

In its third-quarter results, Tellabs noted that its fiber access revenue of $114 million was �an all-time high,� but some in the industry wonder whether it will remain at that level. Tellabs is the primary access equipment supplier for AT&T�s (and the former Bellsouth�s) FTTC initiative, but AT&T has recently begun making some noise about a more FTTP-centric approach. In a Sept. 17, 2007 research note, Morgan Keegan (www.morgankeegan.com) analyst Simon Leopold noted that �the FTTC purchases could spike if AT&T makes a �last buy� to stock-pile spares before capping deployment, but ultimately, we expect AT&T to shift to an FTTP architecture for new home developments with gear from Alcatel-Lucent or Ericsson rather than FTTC.� What this means for Tellabs remains to be seen. Meanwhile, Wall Street is again touting it as an acquisition target.

Infinera: The company announced its IPO in 2007 and made inroads into Europe, inking at least three contracts there. Ovum RHK ranks it the top North American DWDM supplier. And now the company is jockeying for position at the top of the 100-Gigabit Ethernet heap.

Alloptic: Alloptic made a strong push this year with its MicroNode and RF over Glass (RFOG) products; vice president of marketing Shane Eleniak tells Lightwave the vendor has inked deals with two Tier 1 MSOs�one on each coast. Among PON vendors, Alloptic seems to be leading the pack of potential cable MSO suitors. And it just secured an additional $24 million in funding to ramp up that effort. Can you survive as an EPON vendor without a major win in Asia?

ADVA Optical Networking: Infonetics ranks it number one in Ethernet Access Devices (EADs), and the company further strengthened its relationship with BT this year, announcing 100,000 Ethernet ports shipped to the carrier. Its FSP 3000 is seeing traction around the globe. But how does it continue to prosper when stacked against mega-vendors with broader product lines?

Nokia Siemens Networks: Like other super-vendors, Nokia Siemens Networks seems to be experiencing some post-merger woes. But this year, the company did purchase Atrica, whose name is synonymous with Carrier Ethernet, arguably one of the hottest technologies today.

Source Photonics: The company, formed when MRV/Luminent purchased Fiberxon, is following the IPO path Optium and Opnext trod last year. With concerns about a weakening economy�not to mention the fact that both Optium and Opnext stock has lost much of its initial value�how Wall Street reacts to Source Photonics� offering may determine whether we�ll soon see other IPOs in this space.

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