Luminent is profitable, a rarity among optic IPOs,
by Briton Ryle
The American Dream: hard work, saving, and investing for retirement — or get rich quick schemes that end in misery? My guess is the latter. The irrational and intoxicating belief that fabulous wealth is there for the taking has a chokehold on American society.
Call it what you want: lotto fever, Regis-envy, etc., the answer to "Who Wants to be a Millionaire" is always the same: me. After all, the United States is the Promised Land, the shining castle on the hill. And the hoi polloi believe they should be living like kings within the shining walls.
Easy money is a fantastic but harmless delusion. Until it becomes a national obsession. Hundred-million dollar, multi-state Big Game jackpots, prime-time game shows, stocks and (spurious) tobacco lawsuits are all examples of how entrenched and twisted the whole personal wealth construct has become.
A curious blend of egotism and slothfulness makes the easy money scenario seem plausible, even tangible (despite overwhelming evidence to the contrary). For starters, we irrationally believe we can conquer any situation, regardless of experience or skill. Add to this the belief that our innate and undeveloped talents entitle us to the good life, and you've got all the makings for a colossal modern tragicomedy.
The envelope please...
My personal Academy Award goes to that group of greedy, neo-romantic egomaniacs who agreed to be marooned on a desert island and compete in stylized primitive contests for the chance at a big payoff, all to the squealing delight of an utterly immature American television audience.
Of course, I'm speaking of CBS's hit show Survivor, the game show that manages to bridge the gap between Ernest Hemingway and Gilligan's Island. I nearly made it through two entire episodes, but a queasy stomach finally got the best of my curiosity.
Wall Street Survivor
Until March of this year, tech stocks were livin' large in their own little tropical paradise. Just the hint of "optical" or the whisper of "wireless" sent stock prices soaring. And then a strange thing happened: techs started getting kicked off the island. The dot-coms were the first to go. Investors finally figured out the zero-sum Internet business plan and voted no. Amazon (AMZN:NASDAQ) and Dr. Koop (KOOP:NASDAQ) are two notable dot-coms now well off their highs. Next to be sent packing were the B2Bs, with Internet Capital Group (ICGE:NADSAQ) and Commerce One (CMRC:NASDAQ) getting whacked.
Then wireless got the boot. Starting with Qualcomm (QCOM:NASDAQ), skepticism tainted the outlook for Motorola (MOT:NYSE), Ericsson (ERICY:NASDAQ), and even my beloved Nokia (NOK:NYSE). Competing standards, expensive license auctions, and even doubts about the availability of spectrum brought about the downgrades. Of course, growth numbers are still very impressive, but the easy money picks have backed off just a bit.
At the very heart of wireless is the semiconductor. The ultimate picks-and-shovels play, semis have been hit by doubts in recent weeks. LSI Logic (LSI:NYSE) got absolutely creamed. Notable exception status goes to Intel (INTC:NASDAQ) and Broadcom (BRCM:NASDAQ).
Then there was one
The wireless sector provides some good examples of how expectations get ahead of reality. Take Motorola. Analysts hoped to see 100 million phones sold in fiscal 2000. Motorola said the same thing, but then they told analysts that 80-85 million phones was more realistic. The revision, or clarification, sparked a near panic, even though 80 million phones represents a 60% increase in phone sales. Motorola has not revised earnings per share or net margins.
Nokia also got nailed when they estimated third quarter profit margins will shrink, despite the fact that Nokia grew revenues by 55% and gross margins hit 39% in the second quarter. Does this justify a 25% drop in valuation? Obviously not. But the stock market overreacts sometimes. And when you're shooting for the moon, anything short is a failure.
The fiber optics industry is the last tech on the island, the sole survivor. Nobody's stabbed holes in bandwidth demand numbers. Yet. Though I'm sure analysts will try. Not out of spite, or any insider plot to bring prices in the optical sector down so they can load up. But simply because there's a massive re-thinking of tech valuations going on.
Everyone says the market looks 3-5 years out. Clearly that's a bunch of hooey. Sometimes the market is unsure and shortsighted, and that makes for a great opportunity to pick up quality stocks at a discount.
Gotta stay focused
Getting back to the point, optical stocks are the last ones on the island. To be sure, expectations are high for the sector. Leaders like JDS Uniphase (JDSU:NASDAQ) and Corning (GLW:NYSE) carry high valuations that reflect investor optimism. And the IPO market for optical companies is smokin'. Just look at the recent debuts of Corvis (CORV:NASDAQ) and Avici (AVCI:NASDAQ). Corvis now carries a US$35 billion market cap and it hasn't sold a damn thing. Zero. Zip. Nada. And losses topped US$70 million for the last fiscal year. Avici seems the better value with a US$7 billion market cap and US$2 million in revenue for the just completed second quarter. Did I say value? Based on these two examples, the optical sector is due for a re-rating.
I've recommended a couple of small cap optical companies in the past, with results that were, well, not all I would have wanted. This month, though, I have an optical company that sports a US$3.5 billion dollar market cap. But as you'll see, this valuation represents a true bargain in the space.
The optical incubator
Until we get out from under interest rate hikes and tech revaluations, it's best to concentrate on the established players. And I think I've found a truly undervalued optical company in MRV Communications. I've been watching this one for a while, but it's only now that I think the company is really ready to reward its stockholders.
MRV is an incubator, much like Internet Capital Group or CMGI, with one big difference. After MRV IPO's one of its babies, it plans on distributing shares to stockholders. And as you'll see, this could be a windfall for investors, though I'm not promising we'll get rich quick.
MRV did US$288 million in sales for fiscal 1999, which means it sells for just 12x sales. Sounds like a lot until you consider that JDS Uniphase sells for close to 60x sales. Comparisons with JDSU don't end there. MRV's first IPO, Luminent, will be only the second company in the world, after JDSU, that sells and manufactures passive and active components for optical systems. For a more detailed discussion of Luminent products, please see Sui-Yee's IPO article in this issue.
You'll see MRV called an optical incubator in the press, but it's much more than just optics. MRV runs the gamut of networking products, from wireless last mile coverage to terabit routers and network management products.
The IPOs
Luminent is the result of several acquisitions. Its products include thin film and fiber-Bragg grating filters for DWDM (dense wave division multiplexing), WDM couplers, attenuators, add-drop multiplexers, detectors, transmitters, laser diodes, and transceivers for single-mode fiber optic transmission. In a nutshell, Luminent can create the beam of light and the components to move the beam around the network.
Luminent is profitable, a rarity among optic IPOs, earning US$4 million on US$65 million in revenues last year. Revenues have already hit US$43 million in the six months since December 1999. The US$207 million IPO will probably involve 12 million shares offered in the US$17 range. MRV will then hold 80% of Luminent stock, which it plans to distribute to MRV stockholders within 6 to 12 months of the IPO. MRV currently has 57 million shares outstanding, and holds 144 million shares of Luminent. That means the distribution ratio should be 2 shares of Luminent for every share of MRV. Not bad.
Now, we all know that stock is very rarely sold at the IPO offer price. How would the venture capitalists make money if the average Joe got the same deal? At US$17 bucks a share, Luminent will carry a US$2.5 billion market cap. Remember, MRV's market cap is only US$3.5 billion. I think there's a good possibility that Luminent will exceed MRV's valuation.
Number two
Following quickly on the heels of the Luminent IPO will be the coming out party for Optical Access. If you ask me, this one's gonna be the blockbuster. Optical Access has a very compelling last-mile solution. In case you didn't know, "last mile" refers to the link between a telephone company central switching office and your house. DSL is one solution for bringing megs of data to the home, as is fiber-to-the-curb. But both solutions have one thing in common: cost.
Any company can offer DSL service, but they have to lease space from the phone company. And running fiber links to every home is still prohibitively expensive. Optical Access provides a solution that lets service providers bypass the phone company without the
expense of bringing fiber to every home. It's called
wireless optical.
The idea is to run fiber from the nearest network ring to a central point and then wirelessly transmit data to the end user. Of course we've heard this idea before. AT&T has been testing wireless data for over a year, with very poor results. But MRV and Optical Access have overcome many of the problems that have plagued AT&T and others.
For starters, Optical Access can cover two miles with data rates as high as 155 mbps. But what makes this solution feasible is the mesh architecture it employs. Mesh architecture allows the datastream to saturate an area, eliminating any line-of-sight and weather problems. Point-to-point and point-to-multipoint wireless broadband need line-of-sight. Both of these systems also suffer serious signal degradation in heavy rain, and especially in fog, as anyone with satellite TV knows.
MRV will be filing for an IPO of this division before the end of September. It sounds too good to be true, but MRV will probably IPO three companies by the end of the year. And MRV shareholders can get a piece of all of them.
Then there were three
The third IPO will be the iTouch division, which provides network management solutions. Network management sounds boring, but it's leading the charge to smart networks that can prioritize content, allocate bandwidth and charge customers accordingly. This is the space Akamai Technology (AKAM:NASDAQ) is in.
iTouch also provides remote network monitoring equipment and a strong line of optical components called Fiber Driver. The product line includes converters, repeaters, switches and CWDM (coarse wave division multiplexing) technology that can accommodate gigabit speeds (billion of bits per second) over distances up to 110 kilometers (68.2 miles).
Financial data for both iTouch and Optical Access are still considered part of MRV. When MRV files an S-1 for each company's IPO we'll get a better idea of what these divisions are worth. Right now, with Luminent looking at a US$2.5 billion market cap, I think it's safe to say that the parts are worth more than the whole. A lot more. And all you have to do to participate in this massive unlocking of shareholder value is own MRV stock.
AprËs le deluge...
Now, I can see the question coming, "What happens to MRV stock after it has spun off all of its value?" Could this be another 3Com/Palm Pilot deal, where the parent company gets crushed almost as bad as the spinoff? In a word, no. First of all, Palm is a one-trick pony. Anybody that expected this stock to maintain a US$40 billion market cap on US$1 billion in sales got what they deserved. In my opinion, with over a billion shares, the stock is still overvalued.
Optical Access, Luminent and iTouch are all more well-rounded companies, haven't had massive stock dilution, have a better target market and better profit margins. But most importantly, MRV isn't spinning off all of its value. Fact is, MRV has funded several other startups and still holds large equity stakes in all of them. Charlotte's Web, Zaffire, and Zuma Networks will help support the MRV stock price after all the IPOs.
Let me give you a brief rundown of the partner companies, because there's some really interesting technology going on here, too.
Charlotte's Web
MRV owns 53% of Charlotte's Web, maker of terabit routers. One router can handle 200 gigs a second, but the routers can be clustered to handle up to 5 terabits of data per second. This is a strong selling point, because carriers can add to their capacity on an as-needed basis. And Charlotte's routers, named Aranea (I think that has something to do with spiders) are fully compatible with Cisco equipment, which means carriers can do partial upgrades.
The Aranea router is only about three feet high. Compare that with Avici's router, which is 7 feet tall and weighs 875 pounds. To hit 5 terabits, you need 14 of those behemoths. I think Charlotte's Web has the more practical solution. Maybe that's why Juniper took an equity stake in Charlotte's Web in the last round of financing. MRV's 53% piece could be worth a fortune if Charlotte's Web IPO's.
Zaffire and Zuma
Juniper has also done interoperability tests with Zaffire, which is 20% owned by MRV. Tests went well enough for Juniper take a stake in this company as well. Zaffire has created an optical networking system for the metro area, the final frontier for optical networks. Morgan Stanley and Bank of America Securities, among many others, have also invested in Zaffire.
Williams Communications (WCG:NYSE), another investor, is currently testing Zaffire's lead product, the Z3000. The Z3000 will expand the capacity of metro networks using less power and a smaller footprint than any other product on the market. It's also backwards compatible to SONET architecture, as well as designed to work with future network topography. Zaffire has created a proprietary technology that allows a metro fiber ring topography to act like it was mesh topography. In other words, any node on the network can communicate with any other node directly. For more discussion on network topography, you should really check out the website www.lightreading.com.
I'm starting to run out of space and I feel like I've barely scratched the surface of this complex company. I highly recommend you call Diana Hayden, investor relations rep for MRV. Her number is 818-773-0900, ext. 362. You could also spend hours perusing the websites for MRV and its partner companies at www.mrv.com.
I just want to quickly mention Zuma Networks, yet another partner company 90% owned by MRV. They make a Linux based switch/router combo. The switch is packed with 64 CPUs, giving it supercomputer speeds. Zuma deployed the world's first Gigabit Ethernet network and had a hand in establishing the standards for this technology. There. I'm done.
Outlook for MRV stock
Up till now, MRV Communications has remained fairly anonymous. I doubt that's going to last as the steady stream of IPOs calls attention to this company. As it stands, only two Wall Street analysts follow MRV. Amazing. There's a number of ways to play this stock. I bought some, a whopping 100 shares at US$58, and I plan on holding till I squeeze out every share of the IPO companies I have coming to me. I like the buy and hold thing. But if you have a trader's mentality, I imagine this could be a good stock to trade. I anticipate wild swings in the stock — spikes up before IPO distribution and troughs afterward. If you decide to trade it, pay close attention to the distribution dates and the shareholders on record dates. You don't want to miss getting your share. Also, as Sui-Yee will tell you, there's plenty of short-term profit potential to be found in the Luminent IPO alone.
I'm going to set US$60 as an entry point for MRV Communications. I think there will be some hype and a corresponding run-up in MRV before the Luminant IPO, which should occur before the end of September. If the stock runs too hard, a pullback is likely after the IPO, which will give us a good entry point. I'll be tracking the action and revising this entry strategy on the Taipan Bureau of www.247profits.com. Full disclosure: As I stated above, I personally own shares of MRV Communication.
Add a little more fiber to your portfolio with Luminent, Inc., and let the profits shine!
by Siu-Yee Ng
Within the last decade, we have seen the communications network undergo major (r)evolutions. The original purpose of network infrastructure was to deliver voice traffic. But with increased use of the Internet and other data-intensive applications, the original communications network has met its match. This has driven service providers to invest significant resources in new network infrastructure, and communication equipment vendors to rapidly upgrade equipment to provide greater network bandwidth and increased transmission speeds.
Ryan, Hankin & Kent, a research firm, believes that Internet and other data traffic will increase by more than 4000% between now and 2003. To meet this demand, service providers are scrambling to lay fiber optic networks. This technology involves the transmission of data via pulses of light in optical fibers, and provides higher quality and greater bandwidth over longer distances than traditional copper wire.
The proliferation of fiber optic networks has generated significant demand for singlemode fiber optic components and subsystems. These are split into two broad categories: active and passive components. Active components are the core technology for optical networks, requiring some input of power to generate, boost or transform optical signals. Passive components are used to direct, split and merge optical signals without the use of electricity, and are necessary for wavelength division multiplexing (WDM) systems.
The Multimedia Telecommunications Association, a market research firm, estimates that communications service providers worldwide invested approximately US$33 billion in network infrastructure in 1999. Despite the aggressive deployment of optical infrastructure, data traffic growth continues to strain available capacity. Given the extreme cost and time involved in laying additional fiber over long distance networks, service providers seek component solutions that maximize utilization of installed fiber optic networks rather than replacing or adding to them.
WDM enables service providers to increase the capacity of their existing optical networks in a cost-effective manner. It is used to separate or combine light of different wavelengths or colors, increasing capacity by enabling simultaneous transmission of data along numerous wavelengths on the same fiber optic cable.
Faster is better
Optical fiber is currently being deployed across the three major segments of communications networks: long-haul, metropolitan and access. Long-haul networks connect the communications networks of different metropolitan areas around the world and transport large amounts of data and voice traffic. To solve congestion problems, service providers have invested significant resources in the deployment of optical infrastructure, including the use of dense WDM (DWDM).
As a result, current long-haul networks provide very high bandwidth for transmitting data over very long distances. The build-out of long-haul networks represents an important step in improving network infrastructure to support increased demand for new services and greater traffic volumes.
Metropolitan networks connect long-haul networks and access networks. The existing metropolitan network infrastructure has become a bottleneck for the provision of communication services to businesses. Consequently, service providers have begun to invest in infrastructure to help reduce capacity constraints in this portion of the network.
Access networks include business and residential networks. Business access networks connect metropolitan networks and businesses. Traditional business access networks use existing copper-wire-based solutions, which are slow compared to the high-speed networks commonly used within businesses. Both established and new service providers are deploying new technologies to provide high bandwidth connectivity to the business user.
Residential access networks provide connectivity between the metropolitan network and the home. Currently, multiple services such as cable television, satellite, telephony and high-speed data lines are being offered to home users based on multiple copper solutions. As high data rates and new services become widely available to the home user, copper-wire solutions will be increasingly unable to meet consumer demands.
Service providers are beginning to deploy fiber-to-the-home, or FTTH, and fiber-to-the-curb, or FTTC, giving residential users a wide range of current and future services. The widespread introduction of optical networks servicing the metropolitan and access markets will generate significant demand for singlemode fiber optic components.
Single + Single = Power Couple
Singlemode components are coupled to singlemode optical fiber and have superior transmission characteristics in high-capacity longer distance applications as compared to multimode fiber. As data transmission speeds have increased, singlemode fiber has become necessary for even relatively short transmission distances due to its superior performance.
Singlemode fiber has progressed from being the fiber of choice in the long-haul market to being the preferred fiber for most high-speed transmission applications. As speeds and distances continue to increase in the metropolitan and access markets, the need for high performance singlemode fiber optic components will continue to grow.
The increasing use of WDM technology in metropolitan and access markets is also driving demand for singlemode fiber optic components. WDM systems require extensive use of active and passive fiber optic components to enable communication equipment manufacturers to increase system capacity by adding additional light signals on a single optical fiber. The significant growth in the use of WDM systems, combined with the increased use of singlemode fiber in the metropolitan and access markets, is driving the demand for singlemode fiber optic components.
To be competitive in this market, fiber optic component vendors must address a number of challenges, including complex manufacturing and packaging processes and improved delivery times. Component vendors must have high-performance and cost-effective components.
As optical communications networks continue to expand, and systems grow in size and complexity, communications equipment manufacturers will seek to work with fewer vendors offering more complete product lines. Vendors that provide both active and passive components are able to introduce integrated products more rapidly.
Integrated components are typically smaller in size, consume less power and are more reliable and accurate than discrete products that are linked together.
Both active and passive
Luminent, Inc. designs, manufactures and sells a comprehensive line of singlemode fiber optic components that enable communications equipment manufacturers to build advanced systems for the metropolitan and access markets.
Its active and passive products are designed to maximize both distance and bandwidth over singlemode fiber, while providing efficient and reliable transmission. Luminent offers a broad product line of active and passive components in a variety of packaging configurations.
This allows Luminent to satisfy a wide array of customer requirements in metropolitan and access networks.
Luminent also offers a number of products integrating active and passive components, and plans to expand these offerings. As a result of its vertical integration, Luminent can significantly reduce its time to market for innovative product designs
Leaving the womb
From 1988 until April 2000, Luminent operated as a division of MRV and conducted business using MRV's trade name. In December 1999, Luminent was incorporated in Delaware as a wholly owned subsidiary of MRV.
While operating under MRV, Luminent was an early developer of single fiber WDM optical component technology for FTTC and FTTH applications. These components currently provide next generation high-speed services to hundreds of thousands of homes. Luminent also recently introduced coarse WDM (CWDM) components that enable communication equipment manufacturers to implement WDM inside their equipment at a fraction of the cost of DWDM.
Luminent's active and passive components can be further integrated to provide a more complete solution in the form of WDM subsystems. WDM is used to separate or combine light of different wavelengths or colors, which increases capacity by enabling simultaneous transmission of data along numerous wavelengths on the same fiber optic cable.
Its entire line of passive optical components was established through the acquisition of FOCI and QOI in April and July 2000.
MRV plans to complete its divestiture of Luminent within six to twelve months after this offering by distributing all of the shares of Luminent common stock owned by MRV to the holders of MRV's common stock. Once the shares have been distributed, shareholders can immediately sell into the market, which may cause some dilution. We'll keep an eye on this.
Thin red line
On April 24, 2000, MRV acquired approximately 97% of the outstanding capital stock of FOCI, a Taiwanese manufacturer of passive fiber optic components with facilities in both Taiwan and the People's Republic of China. The outstanding capital stock of FOCI purchased by MRV has been contributed to Luminent. Therefore, the results of operations of FOCI have been included in Luminent's consolidated financial statements from April 25, 2000.
On July 12, 2000, MRV acquired all of the outstanding capital stock of QOI, a Taiwanese manufacturer of active and passive fiber optic components. On July 21, 2000, MRV acquired approximately 99.9% of the outstanding capital stock of OIC, a Taiwanese manufacturer of active fiber optic components.
The acquisitions of OIC and QOI were also contributed to Luminent by MRV as of the date of their acquisition, but will not be accounted for since they came in after the fiscal quarter. OIC and QOI have not been included in any historical financial data presented in Luminent's SEC filing.
Luminent began operating under its own name just this year. And with the recent acquisitions it's hard to predict how well the companies will integrate their operations and act under one name. But these acquisitions do offer Luminent a larger customer base and a more diversified product line. This is a development that bears watching.
Seller's market
No investor likes to hear this, but in this case: sell... sell... sell... product, that is. Luminent currently has an extensive network of direct sales and distributors worldwide. Selling sophisticated and technologically advanced products requires prolonged interaction with customers and a focused effort by the sales and marketing group during the qualification process. The company intends to expand both its direct sales force and its distribution network to provide better service to its existing customers and target new customers effectively.
Its main distributor in North America is Unique Technologies, a subsidiary of Veba Corp. Unique Technologies provides extensive coverage in the United States and Canada for Luminent's two tier customers. Other distributorships have been established in Germany, Japan, the United Kingdom, Taiwan, People's Republic of China, Korea, Benelux, Israel, South Africa, Australia, Spain, France and Denmark. |
