Investors Business Daily, October 29, 1999
SDL, Inc.
Firm Sheds Light on Internet Connections
by Eric Feigenbaum
Light travels faster than sound, and computers know it. That's why the ability to send data and communications through optical circuits is becoming more important to the world's top businesses.
No wire technology moves data faster than fiber optics, which sends signals of light through microscopic glass fibers. That means data, voice, video and any communications signal can move at the speed of light.
Trouble is, light needs a little help moving quickly down a long, thin line. It needs to be reflected and amplified to make it through an enclosed space to a destination half a world away.
SDL, Inc. works to get it there. The company manufacturers laser pumps and other optical equipment to build and improve fiber-optic channels. SDL specializes in equipment that helps improve and guide Internet traffic.
Conrad Leifer, analyst at U.S. Bancorp Piper Jaffray Securities, says SDL is one of the best-positioned communications equipment suppliers in the industry. He says the company produces some of the best laser pumps in the high-end market.
And the high-end market is what SDL is all about, says Chief Executive Donald Scifres, SDL wants customers with both high quantity and quality needs. The company invests heavily in product development to develop the latest, but often most expensive, technologies, Scifres says.
In recent trade magazines, more than five SDL products have been featured as tops in the field. Scifres says SDL's products stand out because they combine reliability with power.
He finds the results encouraging. Lucent Technologies Inc., Alcatel Alsthom and Corning Inc. each represent 10% of SDL's business. Scifres sees more such clients in the future. So SDL is expanding the product line. It recently expanded into modulators and bought two new fabrication plants. Leifer says SDL is leveraging its name with more products and probably will succeed.
"They're in a strong market with very good technology," Leifer said. "The whole telecom market is relatively new. They have a lot of savvy people who know the photonics industry very well and know how to keep up with the trends."
And the demand for the next few years appears almost infinite, says Chris LeBlanc of Banc of America Securities. He feels high-tech communications companies will need as many optical components as SDL and others in the field can manufacture for the next 18 months and beyond.
One of the big reasons for SDL's demand increase is the significant shift in where carriers are getting their supplies. Large, vertically integrated telecommunications companies used to do more manufacturing themselves. In the past few years, though, they've faced greater needs for quantity and reliability.
So they've turned to contracting out work to companies that specialize in optics. SDL is one of the best-known specialists.
While everything appears to be running smoothly, challenges have more to do with staying ahead, instead of getting ahead.
"Our research and development has put us in the forefront of where technology is going. Our products are better. But we've got to keep innovating to keep our differentiation," Scifres said.
In recent months, Scifres added several new executives from Lucent's executive and research areas. Last year, the company spent $10.7 million in research, some of which came from federal grants for the more cutting-edge testing.
As a result, SDL has developed equipment to allow wavelengths per strand to expand exponentially -- from 16 to 200 -- allowing for better and faster transmission rates. Fiber-optic cables, coupled with the right equipment, can now transmit up to 10 gigabytes per second. That allows more data to travel than most personal computers can hold on their hard drives.
Scifres estimates SDL will break the next barrier, allowing hundreds of gigabytes a second as it develops faster modules.
But in order to enjoy the success of innovation, SDL has to learn how to make its products fast enough. That's why it bought a plant in Victoria, British Columbia, and expanded its plant in Santa Clara, Calif.
"For SDL, incremental capacity improvements are the biggest challenge," LeBlanc said. Despite the improvements the company has made recently, it will probably need to develop more production capacity if it wants to take full advantage of the long-term market demand, he says.
SDL shares trade as SDLI near 105. In the third quarter, the company earned 22 cents a share, up 214% over the year-ago quarter. Concensus estimates call for 70 cents a share for 1999, up 112%, and $1.13 for 2000, a 61% increase.
Scifres and analysts agree that none of the challenges SDL faces are a serious threat at this point. The main way SDL became profitable was through strong research efforts, Scifres says. He doesn't see that changing. He also believes that if the company keeps its market position, it can ride a long wave of success.
>>>>
The adjoining charts are quite impressive. Between '99 and '04 fiber optic equipment for land lines is estimated to grow from $3 billion to 15 billion; for cable television from $280 million to $550 million, for SONET computer networks from $1.8 billion to $3.8 billion; and for undersea lines from $1.75 billion to $6 billion.
>>>> |
