by Stephen M. Hardy
Last month in this space I discussed how fears of economic recession might affect the optical communications industry. I concluded that while the market could see a slowing of the momentum generated last year, that head wind was likely to prove temporary – and that the fiber-optic community had certainly endured worse.
A month later, hints that inflation may be in the economic cards haven't calmed the nerves of observers. Yet executives at optical technology suppliers remain optimistic about the space's prospects. Perhaps the most emphatic of these statements came from Yves LeMaitre, who recently left Avanex Corp. to become vice president of global sales for Bookham's telecommunications division and vice president of corporate marketing (yes, the long-discussed merger is underway – one employee at a time).
"I just can see that there's only one way to really fix some of the challenges that the service providers are facing: through the expansion of the optical network," he told me while explaining his move to a company that has been known as much for its fiscal struggles as its technology. "It might not have been very fashionable over the last few years, but I really believed in that trend. And I really believed that the fundamental growth in traffic, the increasing speed [of transmission], will require very advanced technology coming from the optical component players and that the business will actually be very healthy over the next few years."
LeMaitre's faith in the industry no doubt paired with the fact that Bookham had attained positive adjusted EBITDA during its most recent quarter to make the move attractive. Bookham is just one example of an optical technology supplier whose bottom line had finally either approached break-even or crossed it over the past six months. The challenge this year for such companies – one that the overall economic environment may make more difficult – is to sustain this momentum into 2008 and become consistent cash-generating operations.
Several executives with whom I've spoken recently say that at their companies, the strategies to attain this goal and the tools to implement their plans are in place. Now it's just a matter of that well-worn management term, "execution."
Again, I turn to LeMaitre for an example. "I think Bookham has a lot of assets – but we have a lot of work to do on execution, on making sure that we go from being the technology leader to becoming the market leader," he told me. That means taking the assets in which LeMaitre has so much faith and turning them into products that meet customer needs – not only in performance, but in terms of Bookham's ability to cost-effectively manufacture tens of thousands of these products a year while accurately meeting lead times.
Jerry Rawls, chairman, president, and CEO of Finisar, also used the "e word" in describing what his company has to do to maintain its status as a market leader while pushing for consistent profitability. (You"ll see more from this interview next month.) Like LeMaitre, Rawls said that it's not enough to have good technology. You need to be able to deliver it how, when, and in the quantities the market wants to receive and implement it.
Component and subsystem suppliers, of course, aren't the only companies for whom execution has become a priority. We reported last month that ADVA Optical Networking CEO and co-founder Brian Protiva (whose name I spelled wrong – see mea culpa below) has rearranged his senior executive team in hopes of duplicating the company's European success in North America. Again, the strategy and the team are in place – now it's time to execute.
Up until last year, companies at all levels of the optical communications ecosystem have had a ready excuse for poor performance: the post-bubble Ice Age. However, the generally positive numbers have raised expectations, both inside company boardrooms and outside on The Street. Unless the general economic rumblings grow so loud that they drown out all else, the standards by which a company and its management team will be judged have risen significantly. Rawls, for one, thinks that the backers of companies that have approached the threshold of profitability recently may begin to lose patience if management can't get the company into the black fairly soon. The result could be more companies on the block, he suggests.
Thus, management that fails to execute this year may see their continued employment prospects, and perhaps even the ongoing viability of their companies, facing another meaning of "execution."