Investor's Business Daily article on upcoming optical IPO's:
investors.com
Internet & Technology
Tuesday, September 19, 2000
Fiber Start-Ups Put IPOs
On Their Plates
By Mike Angell
Investor's Business Daily
Could Chatsworth, Calif., turn into the next Ottawa?
It could if two Chatsworth companies make initial public offerings and find their stock getting the same reception as highflying fiber-optic parts maker JDS Uniphase Corp., based in Ottawa and San Jose, Calif.
A third IPO company, this one from Silicon Valley, can be added to the group taking on JDS in some key fiber-optic markets. They hope to match the success of JDS, whose stock is up from 15 in April 1999 to more than 100.
Besides hailing from California, the three pending IPO companies all sell equipment for the hottest portion of the fiber-optic equipment market - gear specifically for the so-called metropolitan market of city networks.
In what’s been a slow time for IPOs, the three companies - Luminent Inc., Optical Communications Products Inc. and Alliance Fiber Optic Products Inc. - could make a big splash.
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Image: Opticals Eye IPOs
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“They’re all well respected,” said Steven Montgomery, analyst at research firm ElectroniCast. “They have a history, they have customers and they’re shipping products.”
Metropolitan optical gear differs from traditional optical equipment, which is used in long-distance networks. The laser signals for metropolitan networks travel shorter distances and require less power.
Luminent Buying Spree
“Many companies have the opportunity to (sell to) the metropolitan market,” Montgomery said. “As far as the equipment is concerned, it’s less stringent. There’s less specifications than for long-distance equipment. It’s going to be the fastest-growing market for optical equipment.”
The first of the three to go public should be Luminent, based near Los Angeles in Chatsworth. It recently priced 12 million shares at $13-$15 a share. It hopes to raise more than $200 million.
Luminent is a spinoff of MRV Communications Inc., a network equipment maker. MRV will retain a 92% stake in Luminent at first. The stake eventually will be distributed to MRV shareholders.
Like its much bigger rival JDS Uniphase, Luminent went on a buying spree this year to add products to its stable. MRV spent some $445 million to gobble up three Taiwanese fiber-optic parts makers for its Luminent unit.
The purchases gave the company active and passive components. Active components require an electrical charge to generate a signal. Passive components just split or redirect signals. Both kinds of parts are used in optical communications products.
“They view themselves like a JDS,” Montgomery said. “They were starting from the active component side and growing into passive components.”
Cisco A Customer
Luminent says 1999 sales, excluding acquisitions, rose 69% to $65 million. The new companies had total sales of $28 million last year.
Aside from one-time costs, Luminent is making a profit. Yet its profit margins have declined. In its filing with the Securities and Exchange Commission, Luminent cited more sales of lower-cost, lower-margin parts to some customers as the reason for its lower profit margins.
One of those customers was British fiber-optic firm Marconi Communications. Marconi is trying to enter the U.S. market by offering fiber-to-home products. It accounted for 40% of Luminent’s sales last year.
Cisco Systems Inc., the largest maker of network gear, accounted for 5% of sales last year. Cisco expects to sell $1 billion of fiber-optic equipment this year. Most of that will be for its metropolitan optical communications products.
Luminent is trying to shift to higher-profit-margin sales. In the first half of the year, Marconi accounted for only 11% of sales.
The other Chatsworth IPO is Optical Communications. It’s a spinoff of Japanese laser maker Furukawa Electric Co.
Furukawa will keep a majority interest in the company.
Optical Communications focuses on active components, particularly transceivers. These units convert signals from optical to electrical and back.
“Optical Communications would rank very high in the market for transceivers,” Montgomery said.
Optical Communications transceivers are specifically designed for a city’s shorter-distance fiber network. It also makes optical products used within buildings and superfast optical connections among storage computers.
Optical’s Transceivers
Sales of transceivers, which Luminent also handles, are rising 30% a year, Montgomery said. Among rivals for Optical Communications and Luminent in this field is recent IPO Stratos Lightwave Inc. It went out in June at $21, and trades near 40.
Optical Communication hopes to raise $115 million. It hasn’t set a price or the number of shares it wants to sell. It filed at the end of August, so it could make its debut by late October or early November.
Last year, Optical Communications said it sales rose 89% to $36 million. Profit rose 91% to $7 million.
Cisco accounts for 37% of sales, and French firm Alcatel Alstom SA 13%. Other customers include 3Com Corp., Ciena Corp., Lucent Technologies Inc. and Nortel Networks Corp.
The third pending IPO among optical parts makers, Alliance Fiber, mostly makes passive components which use no electricity.
It said sales last year rose 53% to $7.5 million.
The Sunnyvale, Calif., company wants to raise about $86 million.
The number of shares offered and the price range hasn’t been settled yet. The stock will trade as AFOP.
Alliance Into Dense Waves
Passive components are used in what’s known as dense wave division multiplexing systems. DWDM combines many light signals onto one fiber and split them up again when they reach their destination. This allows delivery of more data without having to install more fiber.
Mostly used in long-distance optical networks, DWDM is finding new uses in cities. E-Tek, which JDS Uniphase bought in January for $15 billion, also makes DWDM parts.
“DWDM is a very competitive field,” analyst Montgomery said. “Companies like E-Tek started out making custom parts. But as these companies get bigger, they can’t be custom shops anymore.”
Alliance got $27.5 million from venture firm New Enterprise Associates. NEA has backed such companies as Juniper Networks Inc., Ascend Communications Inc. and Xros Inc. These last two were bought by Lucent and Nortel respectively.
How will these companies play against JDS Uniphase and others, such as Lucent’s optical parts business?
“In terms of market share, I’d put them in the second tier,” Montgomery said. “In some product lines they are No. 1. But 20% of the optical parts companies have 80% of the market right now.”
But optical is hot.
“There’s a lot of reasons for smaller companies to compete against bigger ones,” Montgomery said. “A lot of manufacturers are looking for second and third sources for parts and are encouraging smaller companies to be in that space.” |
