An emerging market opportunity. According to RHK, the market for AWGs in 2003 will be $1.2B with an expected CAGR for product shipments of 65% from 1999 through 2003 (45% CAGR for sales). Additionally, RHK believes this will be 43% of the total 2003 WDM market, which implies a $2.8B mux/demux market opportunity.
Piri is the market share leader in AWGs, but competition is intensifying. Competitors in the AWG market include NEL and Hitachi in Japan, Nortel, Siemens, IOT (wholly owned by JDSU), Bookham, and Alcatel in Europe. We also believe Corning is in the process of building an AWG fab and JDSU (aside from IOT) is pursuing this technology as well. To our knowledge, the only competitors in commercial production at this time are PIRI, Hitachi, NEL, Bookham, and Lucent, although Lucent continues to have difficulty with its process. Additionally, we believe Lightwave Microsystems is close to commercial production. Separately, we believe this bodes well on the margin for the E-TEK/JDSU merger as the level of competition in the passives market continues to increase, especially from alternative technologies.
Immediately accretive and strategically significant. Management indicated that PIRI's gross and operating margins are higher than SDL's. While we are not changing our model until the closing of the deal, we expect it to be materially accretive. PIRI sales totaled $57M in CY'99 and exceeded $20M in Q1:00, all from AWGs, and we believe $125-150M in sales in CY:00 is possible. Assuming a 77M SDLI share count and the issuance of 11.2M new shares, FY:01 profit from PIRI could be $0.12-$0.15. However, until closing, our estimates remain $379M/1.07 for FY:00 and $575M/1.43 for FY:01. With respect to valuation, as potentially less than 10x next years's sales, it is reasonable on a relative basis.
With the acquisition of PIRI, SDL has opened up a tremendous new market opportunity in the area of passive optics.l While SDL has had some passive expertise after its 1995 acquisition of SeaStar Optics technology from the acquisition has been used only for grating stabilizers for its pump modules. We believe the PIRI acquisition is very significant, especially given the focus on next generation passives and their potential for rapid growth. When combined with the Company's earlier acquisitions of IOC, Veritech, and Queensgate, SDL adds yet another important product category and strengthens its position for next-generation optical systems. We reiterate our BUY recommendation on SDLI shares.
>>>
Looks like the market's figuring out the significance of this acquisition. Up 16 3/8 as we speak.
When Don and Dave told me at OFC they would stay on the leading edge of technology --- and acquire critical pieces as needed --- they weren't kidding.
Pat
Pat |
