Off MF:
JDS UNIPHASE, INC. ("JDSU")
I. JDSU Snapshot
II. Fiber Optics and the Broadband Revolution
A. The Increasing Need for Bandwidth
B. Use of Fiber Optics for Broadband
C. Dense Wavelength Division Multiplexing (DWDM) - The Key to Unlimited(?) Bandwidth Over Fiber
III. Products
A. Lasers
B. Modulators
C. Fiber Gratings
D. Receivers
E. Wavelocker
F. Other Assorted Items
G. Optical Modules
H. The Holy Grail - Optical Switches
IV. Markets, Customers & Competitors
A. Overview of Markets
B. Discussion of the Major Fiber Optics Markets
C. Customers
D. Competitors
V. Barriers to Entry (or, Why JDSU Will Win)
VI. Projections for Increasing Demand
VII. Growth Through Acquisitions
VIII. Management
IX. Financial Performance
I. JDSU SNAPSHOT
* JSD Uniphase Corporation ("JDSU") is a leading optoelectronics and photonics company that designs,
develops, manufactures and markets components and subsystems used in fiber optic telecommunications.
* Although its products are also used in cable television, biotechnology, graphics, printing and other industries, the
primary focus of JDSU - and this report - is the fiber optic communications industry.
* JDSU is traded on the NADSAQ market under the symbol "JDSU"
* JDSU is a member of the NASDAQ 100.
II. FIBER OPTICS AND THE BROADBAND REVOLUTION
A. The Increasing Need for Bandwidth
JDSU's business is built upon the exponentially increasing need for "bandwidth" and "broadband" communications.
There are lots of technical definitions of these terms, but suffice it to say that "bandwidth" is the amount of
information that can be sent in a particular period of time (e.g., megabits per second). You can increase bandwidth
by either increasing the capacity of the wires or increasing the speed over the wires. To analogize to plumbing, you
can either make your pipes bigger or you can push the water through the pipe faster. "Broadband" is generically
used to refer to high speed, high capacity communications, often encompassing many types of information (data,
voice, video, etc.).
There is a broadband revolution under way. This is due to a number of factors, including the rise of the internet,
the ever increasing speed of microprocessors, the continued penetration of computers in the home and in all
aspects of business, and the increasing convergence of the computer, phone, and television. Reports state that
traffic on the internet is doubling every 100 days. Overall network traffic currently consists of roughly 50% data
and 50% voice, but is projected to be 90% data and 10% voice in the relatively near future. (This despite the fact
that voice traffic is still increasing 10% each year.)
The bottleneck for most people working on networks today is no longer processor speed, but rather networking
speed. In other words, your computer isn't slowing you down, your slow network connection is. This is expected
to continue, because the demand for bandwidth is believed to be elastic. As computers communicate faster and
faster, we will want to send more and more information, such as full screen video, uncompressed music in real
time, etc. An investment in JDSU requires a belief that the need for bandwidth will keep increasing for the
foreseeable future - in my mind, a very sensible belief.
B. Use of Fiber Optics for Broadband
Although a variety of technologies have been considered for broadband use, the one with the most proven
effectiveness is fiber optics. Most information devices we use today convey information through electricity, which
simply put is a flow of electrons. Examples include your television, your phone, and your computer. Information in
these "electronic" devices travels over copper wires, and is processed by silicon chips. In contrast, fiber optics
conveys information by sending pulses of light over strands of glass. (See Section ___ below for a more detailed
discussion of the technical details.) Because light consists of a flow of photons, the devices that handle the light are
often called "photonic" devices. Because the information sent via fiber optics travels at the speed of light, it is
generally acknowledged that no other method of transmission can be faster.
Fiber optics is currently far more expensive than traditional electronics. As a result, fiber optics are used primarily
as the "backbone" of communications networks, with the "edges" of the network still transmitting information via
electronics. You can analogize to the highway system - you travel long distances using the interstates, but
ultimately have to exit and take some local roads to get to your destination. As demand for bandwidth continues to
increase, fiber is spreading steadily from the backbone out toward the edges of the network; in other words, more
and more roads are being converted to highways. The aim of "optical networking" is to have as much of the
transmission handled via optical (as opposed to electronic) means, with the ultimate goal being fiber running right
into everyone's home (sometimes called "the last mile").
Until recently, a major flaw with the installation of cross-country fiber optic networks was the problem of
amplification. Because light loses intensity as it travels through the glass fiber, it was necessary insert additional
equipment every so many miles that would read the (now weakened) light signal, convert it to an electrical signal,
and then use that electrical signal to send out a fresh fully-powered light signal. This was not only expensive, but
also far too slow. It made no sense to send signals at the speed of light if they were going to have to slow to
"electron" speed every 100 miles - it was the metaphorical equivalent of putting stop signs on the interstates.
This problem was solved, however, with the creation of the Erbium Doped Fiber Amplifier (EDFA). In english, an
EDFA is a fancy name for an invention that amplifies the light signal in a fiber without having to convert it to an
electrical signal. It is composed of a special chemically altered piece of fiber and an attached laser which adds the
light energy needed to "pump" the signal further down the fiber. (The laser used in the EDFA is called a "pump
laser.") The EDFA was an extremely key development in fiber optics, and is one of JDSU's key products.
Ever since the advent of the EDFA, telecommunications companies have used fiber optics as their network
backbones. This, however, did not solve their bandwidth problems for long. With the explosive increase in
demand for bandwidth, they have been continually running out of room on their networks. This presents a major
problem, because the obvious solution - just lay more fiber in the ground - is extraordinarily expensive
(approximately $75,000-80,000 per mile!). The FAQ for JDSU eloquently describes the dilemma:
"Increased data traffic put telecommunications companies in a bind.... In the early fiber optic networks, each
strand was only capable of carrying one channel of information. With the emergence of high volume data traffic
such as the Internet, the telecommunications companies found that their systems were too small. Another way to
think about the situation is this. The telecoms built multi-billion dollar highways with no speed limits that everyone
wanted to use. The problem was the highway only had two lanes."
C. Dense Wavelength Division Multiplexing (DWDM) - The Key to Unlimited(?) Bandwidth Over Fiber
The limitation on bandwidth in earlier fiber optics systems was in part due to the fact that these systems only used
one color of light (using the highway metaphor again, these were one lane roads). Engineers have discovered,
however, that they can multiply the data capacity of the fibers already in place many times by sending more colors
of light through the fiber at the same time. This technique, called Wavelength Division Multiplexing (WDM), turns
the "one-lane road" fibers into multi-lane super-highways.
WDM operates by separating the color spectrum (picture a rainbow or prism) into a number of "channels", with a
different color for each channel, and with different information going into each channel. All the channels (colors)
are then crammed together to form one light which is sent through the fiber. When it gets to the other end, the
opposite happens -- the light is split into all the different colors, and the information from each gets sent on its way.
This works because light is additive - e.g., you can add a red light to a blue light without losing any part of either
light; instead you get a purple light, which can be split later back into blue and red lights.
Quite simply, the more colors of light the WDM system can handle, the more bandwidth it will give you. In theory,
because the light spectrum can be divided into an infinite number of colors, you could get infinite bandwidth using
WDM. In practice, it requires more and more precise equipment to distinguish between finer and finer gradations
of color, so we currently are nowhere near the infinity mark. The best system on the market now handles 40
colors; companies have announced 80 color systems, but those apparently are not yet available. Systems that
handle more than 8 colors are called Dense Wave Division Multiplexing (DWDM), and systems that use more
than 40 colors are referred to as ultradense or hyperdense
Technical details aside, DWDM is important because it allows telcos to drastically increase the bandwidth on their
existing fibers without digging up the ground. All that is required is that DWDM systems are added to the "ends"
of the fiber. Consider how much it would cost to lay only one new fiber across the United States (3000 miles x
$75K per mile = $225 MILLION), and you can see why demand for DWDM systems has absolutely exploded.
DWDM is the core technology for increasing bandwidth in fiber optic systems, and is the foundation for JDSU's
growth.
III. PRODUCTS
JDSU does NOT sell complete DWDM systems. Rather, it sells the components -the basic building blocks - that
are used to make DWDM systems. These components are bought by companies such as Lucent, Ciena, Nortel
and Alcatel, who use them to assemble DWDM systems, which are sold to telcos such as AT&T, Sprint, Qwest,
Level 3, and MCI Worldcom. (See the discussion below re: JDSU's Customers.).
Prior to their recent merger, Uniphase was the market leader in so-called "active" components - e.g., lasers,
modulators, and amplifiers. JDS Fitel was the market leader in "passive" components (i.e., no electrical input
needed), such as couplers and splitters. Together, their product offerings constitute a catalog of virtually all of the
components necessary for DWDM systems. These are described below:
A. Lasers
Lasers are used in at least two ways in fiber optics systems. "Source lasers" create the light that is sent along the
fiber. A 40-channel DWDM system will need 40 source lasers, one for each color. "Pump lasers" are used to
make the EDFAs work. The most commonly used lasers are semiconductor lasers, which are tiny devices
fabricated in much the same way that computer chips are made. They are made in "batch" form, in a reactor that
very precisely flows gases over a wafer of semiconductor material (usually silicon or gallium arsinide). The wafers
are then processed in various ways to hopefully produce a large number of lasers. The yields from this process
can vary widely, however, and I've been told that creating these lasers is half art, half science. Some of my former
clients have compared it to alchemy.
Lasers come in many different colors (wavelengths), and scientists have found that certain wavelength lasers work
best for fiber optic communications. (The reason why is currently beyond me, but it apparently has something to
do with the composition of the fiber itself and the need to avoid loss and crosstalk.) For source lasers, 1310nm
and 1550nm lasers are used. For pump lasers, 980nm and 1480nm lasers are used. (nm = nanometers, a measure
of wavelength). JDSU offers all four of these lasers as products.
Source lasers will be roughly 15% of JDSU's 1999 revenue (estimated pre-merger), with Ciena, Lucent and
Siemens as major customers. Pump lasers will be roughly 12% of 1999 revenue (pre-merger), with Lasertron and
Nortel as major customers.
B. Modulators
Modulators are devices that encode data onto a light stream for transmission. In english, they flick the light on and
off to represent the zeros and ones being sent as data. This can be done two ways: (1) direct - literally switching
the laser on and off; or (2) external - keeping the laser on but having a piece of material in front of it which
switches from opaque to transparent.
Direct modulation is simple and inexpensive since no other components are required for modulation other than the
light source. However, for high-speed communications, external modulation is preferred because it is more stable
and can operate at higher laser power, allowing signals to travel longer distances before amplification. External
modulators can also "turn on and off" faster, thus allowing for the transmission of higher data rates.
External modulators will be about 21% of JDSU's 1999 revenue (pre-merger), with key DWDM customers
including Alcatel and Ciena (and cable customers including Ortel and Siemens).
C. Fiber Gratings
Fiber gratings are essentially filters, reflecting one particular wavelength and letting all other wavelengths pass
through untouched. (They work much like a piece of colored glass.) Gratings are an essential building block for
the "wavelength terminal multiplexer" - the device that sits at the "end" of the fiber and splits the light back into all
of its individual color components. They are also used in "add/drop multiplexers," which allow the telcos to add or
remove a single color (data signal) from the "middle" of the fiber while allowing the other colors to continue
onward.
They are currently two popular gratings, the fiber Bragg grating and the planar waveguide grating. Their inner
workings go way beyond the scope of this report. JDSU presently makes fiber Bragg gratings only.
Planar waveguide gratings are used (and made?) primarily by Lucent.
Fiber gratings comprised 1% of Uniphase's estimated 1999 earnings, but will be a far more substantial percentage
of revenue post-merger, because JDS Fitel dominated that market.
D. Receivers
A receiver converts an optical signal into an electrical signal. In short, it is the "eye" at the end of the fiber which
detects whether the light is on or off at any given moment. It consists of a photodetector, an amplifier, and
circuitry. A DWDM system will need one receiver for every color it handles. Receivers constituted less than 1%
of Uniphase's pre-merger revenues.
E. Wavelocker
A wavelocker is a device which keeps a light signal finely tuned on a particular wavelength. It is used in
conjunction with the external modulator to produce the many precisely calibrated signals generated in DWDM
systems. JDSU just introduced its wavelocker product in 1999.
F. Other Assorted Items
"Couplers" are basic building blocks which are used to combine and split signals in an optical network. "Isolators"
are used in front of lasers and amplifiers to prevent reflections from entering them. Both are considered commodity
components. "Wavelength converters" convert data from one incoming wavelength to another outgoing
wavelength. All optical wavelength converters are not commercially available yet.
G. Optical Modules
JDSU is also beginning to offer fiber optics "modules" - again, not complete DWDM systems, but larger building
blocks that integrate a number of smaller components. One of its initial offerings in this area is an EDFA, which is
apparently seeing good acceptance in the marketplace.
According to the recent conference call, other modules are still in the design phase. These include configurable
multiplexers (the devices that take the different streams of light and combine them into a single beam of light) and
dynamic add/drops (which will be able to "pluck" different colors out of the light stream on the fly).
H. The Holy Grail - Optical Switches
Although not a JDSU product, the optical switch is notable because it is the holy grail of optical networking. To
date no one has definitively succeeded in creating one (although a company called Corvis claims success, and
many others are working on it). Switches are commonplace in computer networking; they take an incoming
electronic signal and send it along one of multiple paths, depending on the content of that signal. An optical switch
would do the same thing, except that it would be switching light, without ever converting it to an electronic signal.
|
