JDS Uniphase Rides Wave of Fiber Optics: Spotlight
San Jose, California, April 4 (Bloomberg) -- JDS Uniphase Corp. Chief Executive Kevin Kalkhoven was on a mission as he piloted his plane from London to a small airstrip in the Netherlands.
After landing and driving to a company plant in nearby Eindhoven, Kalkhoven took a spot next to four board members at the back of a brightly lit, white-walled conference room. He listened quietly as plant managers explained why they needed an extra $21 million to meet his goals; just four months earlier, he had told them he wanted five times more production of fiber-optic components by 2001.
Then, shedding his leather jacket, he dropped another bomb.
``Five times simply isn't going to be enough,' Kalkhoven, 55, told the stunned group. ``The reality is, we're looking at something like 10, and there's not a day we can waste.'
Such is life at one of the hottest companies on the planet. Though JDS Uniphase, based in San Jose, California, is hardly a household name, without its products, Web pages wouldn't load in seconds and calls from New York to Los Angeles might cost a lot more than 10 cents a minute. From wavelength splitters to pump lasers to diffraction-grating demultiplexers, the company's products are playing a big role in the commercial explosion of fiber optics.
JDS Uniphase stock has jumped 24-fold in the past 18 months, giving it a market value of $76.3 billion, or slightly less than Procter & Gamble Co., the largest U.S. maker of household products.
Astronomical Valuation
If that seems high, consider that JDS Uniphase trades at 563 times 1999 earnings -- astronomical by any measure. To put things in perspective, an investment of $10,000 in the company's initial public offering in 1993 would be worth $4.28 million today.
JDS Uniphase, with 14 acquisitions behind it since then, expects to increase revenue 64 percent to $1.3 billion in the fiscal year ending June 30 and boost it a further 69 percent in fiscal 2001. Profit excluding costs for acquisitions will almost double to $284 million this fiscal year and rise to $477 million next year.
The company today agreed to acquire Cronos Integrated Microsystems Inc. for $750 million in stock to add devices that regulate the strength or direction of light in fiber-optic networks.
A few clouds are building. The company's list of competitors, which continues to grow, includes such industrial giants as Corning Inc. and Lucent Technologies Inc. Customers could turn elsewhere if JDS Uniphase can't streamline production fast enough to meet rising demand. And finding thousands more skilled workers to raise output dramatically won't be easy.
For now, though, the skies are clear.
Starting with its first big components order from Ciena Corp. in 1995, the company has built a list of customers that reads like a who's who of optical networking. Lucent, both customer and competitor, is there, as are Nortel Networks Corp., the biggest maker of fiber-optic equipment, Tyco International Ltd., Alcatel SA and others.
Fervor for Fiber
At the heart of telecommunications networks, JDS Uniphase lasers and modulators are converting phone, data and even video traffic into light and beaming it down strands of glass no thicker than a human hair, sometimes for thousands of miles. One strand has enough bandwidth to handle the Internet access for 17 million homes.
Some forecasters say we'll soon be plugging fiber rather than copper wires into the backs of our computers.
``Fiber-optic equipment is one of the great growth industries,' says Jim Burkart, who co-manages the $5.8 billion Kemper Technology Fund -- including shares of JDS Uniphase -- at Scudder Kemper Investments in Chicago.
As customers order more products than JDS Uniphase can make, Kalkhoven is ramping up output at least fourfold at plants from Switzerland to Australia. Having built up the biggest maker of parts to power the bandwidth boom, he isn't about to let a mechanical challenge like production bring it down.
``Eighteen months ago, we didn't have this building, we didn't have customers, and we didn't have a product,' Kalkhoven said in February while surveying the construction of a new wing at Eindhoven. ``What I saw today was beyond my wildest dreams.'
Too Much of a Good Thing?
Kalkhoven, who relaxes by zipping around in his Acura NSX or feeding sharks on diving vacations in the Bahamas, no longer worries about how to make a laser business work. He's more concerned with producing enough to capture the bulk of sales in a component market that is expected to mushroom to $23.1 billion in 2003 from $6.7 billion last year, according to RHK Inc., a San Francisco company that researches demand for telecommunications equipment.
Already, Kalkhoven has turned away orders from Cisco Systems Inc. because his factories were jammed with other business. At the same time, he's busy melding the products and people of six companies he's spent $7 billion to acquire since August, staying ahead in the race to develop new optical technologies and keeping his 11,500 employees well-trained and happy.
Any stumble means handing over market share to rivals: Corning, the former cookware maker that ranks No. 1 in optical fiber, has spent more than $4.3 billion on acquisitions since December to match JDS Uniphase product for product.
SDL Inc., a rival to JDS Uniphase in lasers, is starting to make big purchases of its own. Yesterday, it completed its purchase of Veritech Microwave Inc. for $530 million.
Lucent isn't standing still. The world's No. 1 maker of phone equipment, armed with $2.2 billion in cash, is quadrupling its components output this year and spinning off slow-growing phone businesses as CEO Rich McGinn, stung by a profit warning in January, looks for ways to increase sales growth. Lucent agreed in February to buy Ortel Corp. for $2.95 billion to compete with JDS Uniphase in lasers for cable TV networks.
``This is an explosive market that's attracting a lot of money,' CIBC World Markets analyst Jim Jungjohann says. ``There are probably 30 little start-ups that 18 months from now could be viable competitors to JDS Uniphase.'
Investors paid little attention when JDS Uniphase was just Uniphase Corp., a company founded in 1979 that made gas lasers used to read bar codes and check semiconductors. It was still privately held when Kalkhoven left the helm of Demax Software, which made programs for network security, to run Uniphase eight years ago.
On the Radar Screen
Now that he's hit it big, Kalkhoven has to make up for a lack of experience in volume manufacturing. He's found that the lessons Intel Corp. co-founder Andy Grove mastered to build the world's No. 1 semiconductor company are a good place to start.
``The thing that made Intel great was that it learned to manufacture the microprocessor reliably and in volume,' said Kalkhoven. ``If we don't do that, we'll lose.'
Kalkhoven's first move was to find products that could put Uniphase on the map in telecommunications. He started in 1995 with the purchase of a United Technologies Corp. research unit and added labs from International Business Machines Corp. and Royal Philips Electronics NV in 1997 and 1998, respectively.
Kalkhoven began to entertain thoughts about his biggest deal -- a merger with Ottawa-based JDS Fitel Inc. -- when in early 1998 he started butting up against the company run by Jozef Straus, a refugee from Soviet-era Czechoslovakia, while bidding on contracts and selling parts to each other.
What he didn't know was that Straus had similar ideas. The catalyst for an overture was a poison pill Uniphase put in place in June of that year to fend off takeovers. When Straus found out about the plan, he got Kalkhoven on the phone.
``Do you think I'm going to buy your company?' Straus joked. Within a few weeks, Kalkhoven and Straus were hiking in the Canadian Rockies and discussing whether to combine the companies.
``That's how we got to know how dirty our underwear was,' recalls Straus, who's enough of a mad scientist to make it hard to believe he built JDS Fitel into a $150-million-a-year business from scratch.
The acquisition they announced in January 1999 called for Uniphase to buy JDS Fitel for $3.2 billion in stock. By the time the acquisition closed, the price had more than doubled, to $7.18 billion, as Uniphase shares took off.
Mad Scientist
Since the merger, Kalkhoven has focused on acquisitions, personnel and finance. He relies on President and Chief Operating Officer Straus to figure out the nuts and bolts of production, much as Intel's Grove depended on Craig Barrett to slash production times and standardize plants.
``Kevin is the brilliant strategist who's great at doing deals,' says Marty Kaplan, an SBC Communications Inc. executive vice president who joined the Uniphase board in 1997. ``Jozef prefers the inside role, running things day to day.'
Straus probably has the tougher job. In spite of its futuristic image, the business of making fiber-optic components is just evolving from a cottage industry. Many parts are still made or assembled by hand, often with crude machines.
At the plant in Eindhoven, chip wafers that get turned into $2,000 semiconductor lasers are transferred from one beaker full of toxic chemicals to another in a slow process that resembles a 10th-grade science experiment.
The lasers -- semiconductors that produce light instead of computations -- are marvels of engineering. One kind, the pump laser used to amplify signals on strands of fiber, puts out enough power to burn flesh or cause blindness even though it's smaller than a grain of salt. A thimbleful of them, each worth 280,000 times its weight in gold, is all that JDS Uniphase could produce last year.
Early Stages
Kalkhoven knows it's not a system JDS Uniphase can afford to rely on, especially on a much larger scale.
``People don't understand that we're still in the very earliest part of the beginning of this business,' he says.
To make 10 times as many lasers, the company needs more than new equipment and space to contain it. That's why Kalkhoven is pushing aside the scientists who used to manage his plants in favor of veterans from the chip industry.
Al Frederick, who left National Semiconductor Corp. to join JDS Uniphase as general manager in Zurich, is confident that he can boost yields -- the number of good chips out of every 100 made -- to better than 80 percent in five years from 20 percent today.
``This is just like the silicon business, only we're back in the early 1970s,' he says.
While improving yields is a step in the right direction, JDS Uniphase has a long way to go before it matches the efficiency of the chip industry. And until Kalkhoven and Straus can automate their factories like Intel did, they have little choice but to hire thousands of people to meet demand.
Made by Hand
In Ottawa, where JDS Uniphase makes its most labor-intensive parts, the company is adding 125 employees a week to a roster that already tops 7,100. Most end up doing exactly the same thing: using identical sets of tweezers, vises and microscopes to connect pieces of fiber with the miniature filters that mix beams from different lasers. The company would use robots if the glass weren't so brittle.
``Automation isn't a process that's going to bear important results this year,' says Wit SoundView analyst Kevin Slocum.
Straus is doing what he can to slow the hiring pace. He's installing Oracle Corp. software to keep track of orders, automating some alignment functions and parts testing, and looking for ways to contract jobs out to other companies. The alternative, if the business continues on its current track, is employing 49,000 people in Ottawa in three years.
``It would be untenable,' Straus says.
Meanwhile, the company has to find the right people fast enough. Workers have to pass a series of dexterity and coordination tests, and many applicants with chubby fingers or sloppy workmanship fail.
Swiss Watchmakers
Kalkhoven has been lucky to fill a third of the manufacturing positions in Zurich with Swiss watchmakers. Other plants are having a harder time. One, in Bloomfield, Connecticut, is using radio ads to attract new hires. Another, near Philadelphia, has run newspaper ads to lure workers from Lockheed Martin Corp., Boeing Co. and even Lucent.
Customers are rooting for Kalkhoven to meet his targets. After all, they stand to lose if he doesn't.
Companies from Nortel to Cisco increasingly are relying on component suppliers not only to make enough parts but to develop new products. JDS Uniphase has been making such products since the merger, combining the devices that Uniphase made to generate and regulate light with the JDS Fitel components that change the light's behavior. The result is a module that offers customers more functions at lower cost.
``Everything we're doing at this company is to ensure that our customers are getting what they want,' Kalkhoven says. ``It's as crude and simple as that.'
Making More Modules
Modules are so popular that JDS Uniphase expects to sell 50 percent more of them in fiscal 2000 than it did last year. The prices vary dramatically, depending on the particular function of each module.
Lucent executives don't go a day without thinking about JDS Uniphase. Until two years ago, Lucent held an internal meeting to forecast its component needs once every six months. It now holds the meeting weekly and makes available to its suppliers a special Web site with forecasts that often fluctuate daily.
``Three years ago, I wouldn't have dared to call Rich McGinn,' says Straus, whose company was too small to concern the Lucent CEO back then. ``Today we talk all the time.'
Kalkhoven is taking steps to ensure that McGinn has little choice but to rely on JDS Uniphase even more.
Just when it seemed the company had bitten off more than it could chew in acquisitions, he unveiled plans in January to buy E- Tek Dynamics Inc. -- a rival manufacturer of components used to boost capacity on fiber networks -- for about $15 billion in stock. While the purchase will alleviate some immediate shortages in capacity, it could be more valuable later, when Kalkhoven frees up dollars and engineers by combining parts of E-Tek with the former JDS Fitel.
R&D Defense
To fend off challenges from new technologies, JDS Uniphase has to build up its research and development -- the best defense against new competitors such as Bookham Technology Ltd., a U.K. start-up.
``I'd like to say we have a beautifully refined R&D plan, but I'd be lying to you if I did,' Kalkhoven told director Bob Enos during the February trip to Eindhoven.
Lucent, too, is coming on strong with a component that combines its communications semiconductors with optical parts. Analysts predict that this new type of module will be the next big thing.
Such a product may be what Kalkhoven has in mind when he speaks of Phase Four, the next stage in a growth strategy he set in motion five years ago. In the first two stages, he brought together key technologies by acquiring facilities such as the one at Eindhoven, formerly a research lab owned by Royal Philips Electronics. He then bought up manufacturing capacity with Optical Coating Laboratory and E-Tek.
Now, he's in the middle of Phase Three, the production boost that he plans to complete by the end of this year. Kalkhoven is staying mum on exactly what Phase Four is, though he's dropping a few hints. For starters, it's based on his expectation that 1 billion people will be using cellular phones by 2003. That proliferation will place new pressures on telecommunications networks and feed demand for optical components.
Beyond that, he'll say only that Phase Four requires JDS Uniphase to make new acquisitions that will carry it into another, unnamed industry. If nothing else, Phase Four is enough to keep Kalkhoven busy.
``I always tell the story of my Uncle Max,' he says. ``He was the guy who gave me his sage advice as I left Australia, which was, you never leave a party till the booze runs out.'
Clearly, at JDS Uniphase, the tap is far from dry. |
