Interest in fiber optic transmission has grown with the increase in activity surrounding the fiber optic realm. JDS Uniphase (JDSU : Nasdaq) recently announced it will acquire rival E-Tek Dynamics (ETEK : Nasdaq) in optical components, companies developing optical routers receive multi-billion dollar valuations before generating any revenues, and yet many investors are not even sure what the companies do. Today, we will explain some of the basics behind fiber transmission and what components are used to transmit light signals.
Fiber optics involves the transmission of light through a glass fiber. Traditionally, telecommunications providers have transported voice information using electrical signals over copper or coaxial wires. As the Internet has developed, though, voice is now sharing the conduit with data, video, and other multimedia applications. The amount of bandwidth required to transmit voice is significantly lower than that for video. As all these applications increase total bandwidth requirements, service providers must provide a transmission medium that can handle the demand. Fiber optics has emerged as the best alternative to date.
How an Optical Signal is transported across a Fiber Optic Cable
DWDM Terminal - Amplifier - OADM - Amplifier - DWDM Terminal
Fiber optic transmission can be broken down into a few major components. To create the light, a source laser generates a beam of light to transmit down the fiber. This source laser is housed within the dense wave division multiplexing (DWDM) terminal along with the multiplexer. With new technologies, such as Wave Division Multiplexing (WDM), each fiber can transmit several wavelength of light, or color. The leading manufacturer of source lasers is JDS Uniphase (JDSU : Nasdaq).
For transmission down the fiber channel, the multiple light sources must pass through a multiplexer. The multiplexer is the point where light is actually broken down into its particular wavelength, or color. Therefore, if a particular fiber is to carry 80 wavelengths, or colors, 80 separate source lasers send light to the multiplexer, where the wavelengths are separated and passed through the fiber. (Note: technically, division of light beyond 8 channels is referred to as dense wave division multiplexing, or DWDM).
One of the problems with optical transmission over long distances is the degeneration of the signal. As the signal travels over distance, the signal becomes weaker. Previously, the signal had to be converted from optical to electrical before it could be regenerated. With WDM networks, optical amplifiers can be used to refresh the signal.
The most common type of optical amplifier is the EDFA amplifier. EDFA stands for Erbium Doped Fiber Amplifier. To regenerate the signal, a pump laser excites a section of fiber with erbium ions in the core. The erbium ions give up their energy to the optical signal passing through and return to their unexcited state. SDL (SDLI : Nasdaq) is the key provider of pump lasers used in these optical amplifiers, although JDS Uniphase is also very strong in this market.
Another key component for transmission down a fiber channel is the optical add/drop multiplexer (OADM). The OADM allows a signal to be added or dropped between the originating source laser and the terminating end. This allows for more flexible signal transmission. For example, if a fiber originates in Los Angeles and terminates in New York, an OADM allows a signal to be sent to Dallas.
At the termination point, the signal must pass through a demultiplexer. The function of the demultiplexer is to separate out the signals into their individual components. There is another source laser as well, so that for every fiber channel, there are at least two source lasers.
JDS Uniphase Why is everyone infatuated with this company?
JDS Uniphase has bought itself into the heart of the optical component market. The company produces components used in optical equipment by such industry leaders at Lucent Technology (LU : NYSE), Nortel Networks (NT : NYSE) and Ciena (CIEN : Nasdaq). Following is a sampling of components the company manufactures:
Source Lasers
Pump Lasers
Modulators
DWDM Multiplexer
Optical add/drop modules
EDFA modules
The large optical equipment companies have outsourced the manufacturing of many of these components in an effort to minimize their time to market on critical devices. As such, JDS Uniphase has bought several companies to help develop a comprehensive product list. As devices become more demanding, the optical equipment companies will look for highly sophisticated products from these component suppliers. With the broad product line, JDS Uniphase can integrate many of the components into modules or subsystems, thereby easing product development for the equipment companies.
Competition
There are only two major competitors for JDS Uniphase, Corning (GLW : NYSE) and SDL, Inc. While SDL only manufactures passive components (those components used to guide light along a fiber), Corning does offer both active and passive components. However, JDS Uniphase has the broadest product offering and continues to strengthen its position. The recent acquisition of E-Tek Dynamics (ETEK : Nasdaq) increases the companies manufacturing capacity as well as improves its product portfolio.
Outlook
Optical components are being driven by three main factors:
Increasing reliance on outsourcing by equipment companies
Manufacturing yields of only 20% on some components (as manufacturing efficiency increases, profitability should increase significantly)
Addressable market growing at close to 50% over the next three years
Based on its strong market position and difficulty of the business, we feel JDS Uniphase has tremendous momentum going forward. While the market has been generous in its current valuation, any short term pullback in the stock price should be seen as a buying opportunity. |
