Vendors find profit in data markets

March 1, 2005

Last year’s list of Top 5 components/subsystems vendors was shaped largely by mergers and acquisitions. Most of the focus in 2004 appeared to be on somehow turning the assets acquired over the last few years into revenue generators. For most companies, that meant focusing on products that supported the drive toward data. As most of the major vendors struggled to achieve profitability in 2004, sales volumes proved to be the deciding factor in determining our Top 5 this year.

JDS Uniphase remains at the top of our list and at the top of the list for every analyst with whom we spoke. Last year, the company acquired E2O Communications, whose product line comprised a variety of data-transceiver products. Perhaps most intriguing from a technology perspective is the new asset’s long-wavelength VCSEL work, which the E2O founders claimed was capable of meeting 1550-nm transmission requirements, let alone those of 1300 nm.

Significant new-product announcements included a reconfigurable optical add/drop multiplexer based on planar-lightwave-circuit (PLC) technology and a tunable-laser modulator. The company also leveraged small-form-factor pluggable transceivers in an upgrade to its WaveReady subsystem line.

The big question for JDSU is when it will return to profitability. A preliminary revenue and earnings announcement issued in mid-January indicated the company remained just short of its goal for the second quarter, which ended Dec. 31. Revenue was expected to be down about $15 million versus the previous quarter, which would translate into a non-GAAP loss of 2¢ per share. Both figures were less than previous guidance. On the brighter side, the company said its communications business had delivered “another solid revenue performance” and that the primary cause of the shortfall came because of legal expenses incurred by ongoing litigation and a decline in revenues from a major customer in its consumer optics and display business.

Agilent Technologies also holds steady from last year. Once again, its strength in data transceivers paid off; the company announced that RHK had named it the optical-component share leader in 2003 with 15.4% of the market. (Current data from RHK puts them at number two, behind JDSU.)

Not surprisingly, product introductions last year followed the data communications line. The company launched 4-Gbit/sec Fibre Channel transceivers in January 2004 and 10-Gbit/sec transceivers in all the popular data formats (XENPAK, X2, and XFP) at OFC a month later. The company is also among the biggest advocates of the upcoming 10GBase-LRM 10-Gigabit Ethernet (10-GbE) PMD, which aims to specify a single-laser approach to transmitting 10-GbE over at least 300 m of legacy multimode fiber.

However, the company’s optical-component activities aren’t limited to datacom. It also supplies ATM/SONET, DWDM, and CWDM transceivers as well as parallel optical modules.

Agilent’s optical communications component business resides within its Semiconductor Products Group, which includes a variety of optical and IC product lines. Therefore, it’s difficult to assess the overall financial health of this activity. The Semiconductor Products Group had a rough fourth quarter of 2004, which concluded at the end of October. Orders were down 18% from the previous year (although actual revenues were up), while profit was off by $32 million. The margin erosion was due to “severe price pressures in camera modules and fiber optics,” according to a press release.

Finisar makes the biggest move from last year, up two spots from number five. While the company ended 2004 squabbling with Infineon Technologies (then making up last month), the rest of last year was relatively bright. The company reported record revenue for its fiscal 2005 second quarter, which ended last October. Its optical business (the company also makes network test and monitoring systems) enjoyed revenues of $59.9 million in that quarter, an increase of 11% on a sequential basis from $53.8 million in the first quarter and 65% from $36.4 million in the second quarter of 2003. That said, the company still posted a loss of $23 million, slightly more than the previous sequential quarter but $9.6 million less than in the second quarter of fiscal 2003.

So the company appears headed in the right direction. Once again, data subsystems led the way-as well as telecommunications products based on data subsystems. Finisar was one of the founding members of the XFP multisource agreement; in addition to work in 10-GbE devices based on that form factor, the company has pioneered work on extended-reach and DWDM XFP devices. Finisar also has introduced a new industrial-temperature CWDM transceiver for metro applications.

Sumitomo Electric Industries, which markets its components in the United States through its ExceLight subsidiary, makes its debut on our Top 5 list this year. The company does a thriving business in components such as lasers, photodiodes, and ROSAs, as well as telecom and datacom transceivers, passive devices and modules, and optical cable. (Sumitomo Electric Lightwave handles cable sales in the U.S.)

This year has seen an emphasis on 10-Gbit/sec transceivers (including XFPs for SONET and 10-GbE as well as X2 devices for the latter), CWDM transceivers, and 850-nm short-reach Ethernet and Fibre Channel transceivers. On the corporate end, Mike Nishigushi was named president and CEO of ExceLight last November. He replaced Yuji Hamasaki, who now heads Sumitomo’s overall optics activities as executive officer and deputy general manager of the Telecommunications Business Unit.

Bookham drops from third last year to fifth this year. The company continues to attempt to digest the various assets it acquired over the past two years. Observers say one of Bookham’s main problems is cash flow; the company announced a $25.5-million private placement funding, and its acquisition of New Focus was driven to a significant degree by the latter’s ready cash. It continues to struggle toward profitability; its net loss for the three months ending last Oct. 2 was $38.3 million. Meanwhile, Bookham moved its corporate domicile from the United Kingdom to the U.S., setting up shop in San Jose, CA.

On the technology front, the company worked hard to diversify itself into areas other than telecom. Within the optical communications space, it also pushed hard in the XFP arena, announcing a 40-km device early in the year. Other advancements included a tunable directly modulated 2.5-Gbit/sec laser, WDM modules based on thin-film filters (TTFs), a coplanar 10-Gbit/sec receiver, and its Intelligent Optical Platform line. Bookham also announced it will supply TTF passives to Sumitomo for use in fiber to the premises applications

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