Curtis --
A friend sent me the relevant quotes. Now I'm trying to track down Jim Crowe's email address so I can congratulate him on his courage. I'd also like to support any action he takes in terms of reporting GG's abuses to the SEC.
Now, while in-air between Vegas and San Diego (an extremely quick trip), I read a pile of reports on ultra long haul and thought the following comments were applicable to SDLI and JDSU. If you don't read everything, I recommend you check the CAPEX estimates towards the end.
>>>>>
TyCom, Ltd., Deutsche Banc Alex Brown, September 21, 2000:
TyCom intends to use the proceeds of its recent IPO to fund the first phase of its network deployment, which is anticipated to cost nearly $6 billion. . . . [Phase I being installed now and estimated to be complete by 3Q:01.]
Over the next two years, we expect TyCom to be able to address nearly 90% of the data opportunity through its transatlantic and transpacific cables. With the remaining links, in our opinion, TyCom could potentially become one of the few global carriers with the ability to address the entire world’s interregional capacity needs.
[Internet use:] Worldwide users have exceeded 300 million, increasing at a rate of 26% per year (see Figure 10). North America, Western Europe and Asia Pacific, respectively, account for 40%, 35% and 15% of the users worldwide. . . .
Even as the rest of the world moves online, North America continues to be the center of the Webcentric world. The United States accounted for nearly 75% of the hosts (loosely translated to Web pages) in 1999. In addition, out of the top 100 most visited Web sites, approximately 95% were located in the United States during the same period. It seems reasonable to say that traffic flows and capacity to and from North America from Europe and Asia/Pacific are critical for the growth of the Internet as a communications medium. We strongly believe that carriers — such as TyCom, Global Crossing, and FLAG Telecom Holdings — that have recognized the opportunity of data growth, are deploying strategic assets necessary to participate in the transportation game and, in our opinion, will likely become successful challengers to the dominance of vertically oriented companies.
[Chart shows the 100 most-visited websites as originating from the following: “other US” 51%; California 42%; and Non-US 7%.]
More specific to SDLI and JDSU:
The Undersea Opportunity
We believe that there are two fundamental drivers for undersea capacity — traffic growth and the price elasticity of demand. First, as mentioned earlier, the growth of the data/IP opportunity globally and the U.S.- centric nature of the Internet constitute the main driver of interregional capacity. However, with the growth of data/IP traffic, investors often neglect the international voice market. In 1998, over 93 billion minutes of international traffic, which has been increasing at a rate of 15% per year, moved from region to region. Asia, Europe and North America originate approximately 90% of this traffic.
Second, the price decreases in capacity have increased volumes almost exponentially. The introduction of new cables and the relatively low cost of increasing supply through technological innovation, such as DWDM, have combined to lower the unit cost of undersea bandwidth. The incorporation of DWDM technology provides highly beneficial cost dynamics to the extent that fiber capacity may be added at a small fraction of that capacity’s large initial construction cost. As such, DWDM has made network building a high fixed cost business, but an extremely low variable-cost one, thereby erecting considerable barriers to entry, and bestowing a tremendous first-mover advantage over future MNOs. We believe that TyCom has erected the barriers to entry into the undersea market. The company controls the entire process, including the manufacturing of all components and the ships required for laying cable. We argue that TyCom controls critical processes, which could not be replicated by any other company over a short time period. TyCom controls the barriers to entry; therefore, we believe that it could capitalize on pricing power and could also dissuade competitors from overbuilding on routes to which it has already staked a claim.
We are firm believers in the concept of price elasticity of demand, especially in the undersea market. Undersea cables, by their nature, are scarce resources. Keep in mind that, relative to terrestrial systems, the undersea cable system is much more complicated in terms of engineering, logistics, and maintenance. In addition, undersea cables can only be of a limited capacity, when compared to terrestrial systems. Thus, we estimate the price elasticity of demand for undersea circuits to be approximately 2.0 — i.e., a one-unit decrease in the price increases demand by at least two times.
Specifically, we expect demand in the two largest undersea markets — transatlantic and transpacific — to grow at CAGRs of 70% and 80%, respectively, over the next five years. As Figure 13 illustrates, the opportunity in these markets is large enough to support four or five major bandwidth providers. However, these estimates are conservative and, in our opinion, the demand upside will likely be significant as users and applications begin to harness the power of high-speed Internet connectivity and the demand for ever-more bandwidth. . . .
The Multimedia Network Operator — Exploiting the Weakness
Until deregulation and data growth, the telecommunications industry was controlled by a handful of large companies that delivered all services to everyone. These incumbents (both RBOCs and traditional long distance companies), with their vertical orientation, had both the reach and the capital to build networks and market traditional services directly to the end-user. However, we contend that the vertically oriented service companies are ill-prepared to serve the new demands that data transmission is placing on traditional networks. Simply, most incumbents did not foresee the growth in data, and were incapable of deploying investment resources in new network infrastructure fast enough to capture the opportunity.. . . .
We believe that TyCom will continue to leverage its leadership and expertise to competitors. When combined with the company’s fleet, we feel that few competitors will be able to deploy systems more quickly and more efficiently than TyCom will as it and others begin to upgrade and expand their networks. TyCom’s fleet of cable ships and engineers are a powerful force in the industry. After fully integrating its submarine divisions of AT&T and Temasa, TyCom has dramatically increased its annual capacity for producing cable. Prior to the acquisition of AT&T’s resources, the company could produce over 22,000 km of fiber cable. Today, TyCom has nearly tripled its production capacity to over 60,000 km per year. The net result of this increase equates to a reduction of system deployment time by 40% since 1997.
Barriers to Entry
[note these are SDLI’s top customers]
Three major players dominate the undersea cable supply market. TyCom is the largest supplier (40%+), followed closely by Alcatel (less than 40%), and then KDD, which controls the majority of the remaining market (less than 20%). Thus supply constraints represent the first and largest barrier to entry into the undersea bandwidth market. Closely related to supply constraint is a second barrier, time-to-market. We recognize project funding as the third major barrier, especially with the saturation of Telecom issues in the capital markets. . . .
Outlook
The company recently raised $2.2 billion (including shoe) from its recent IPO, which will be applied mostly to network development. We expect the company to spend $5.5–$6.0 billion in capital expenditures in 2001-2002. We believe 75% will be directed to undersea network construction, 20% to backhaul and other dry land construction, and the remaining 5% to expanding its manufacturing capabilities. . . .
Investors should also look to TyCom to lead with innovation. As noted earlier, TyCom is a leader in subsea network technology. Through a division named TerraWorx, the company is adapting undersea technology for use on terrestrial systems. TerraWorx has the ability to transport signals up to 10,000 — without regeneration. This type of technology, when applied in the field, has the ability to disrupt the entire cost structure of the long haul network. TerraWorx technology eliminates upfront equipment costs, cutting build cost of the network. For example, in a long haul build, signal amplification technology would be spread every 85 km; however, no regeneration would be needed. The potential cost savings has the potential to change the view of which the telecom leaders are over the next 3-5 years. Note that no revenue from TerraWorx has been included in the forecast for TyCom, but cost has been added in R&D expenditures. . . .
As most of the cables will be built over the next five years, we estimate CAPEX will remain high until 2005. We expect, the bulk of the CAPEX will be dedicated to building the network with a smaller amount directed to systems and infrastructure. In 2000 we believe CAPEX will be approximately $2.9 billion, peaking in 2005 at $3.3 billion, and falling gradually thereafter. . . .
From Tech 2000: An Investment Overview, DT Alex Brown, November 2000:
U.S. Optical Networking
Despite the recent concerns raised with respect to carrier spending for 2001 we believe the optical networking sector should see robust growth. In our view, carriers will continue to focus on optical transport as the only economical means to handle the bandwidth demand, in addition to optics’ ability to provide immediate revenue benefit due to the ease of provisioning.
However, we think that among the component firms the strong will get stronger and single component/technology vendors will face increasing competition. Our views are fortified by the fact that most of the optical vendors, having reported September 2000 results, remain constrained by
component availability, optical capex is increasing, and significant metro transport and core switching markets are only just beginning. We consider the current weakness as an excellent opportunity to establish positions in companies with proven track records such as JDS Uniphase, CIENA and Sycamore Networks.
North American carrier capex focused on the optical transport segment is expected to grow approximately 38% in 2001, rising to $29 billion from $21 billion in 2000, according to RHK. The growth in the optical transport market is being led by next-generation optical networking/DWDM. We also feel that beyond DWDM transport there are significant opportunities emerging in the metro/optical edge and in core optical switching. According to Pioneer Consulting, the metro/optical edge market is expected to grow to $8.3 billion in 2004 from $1.2 billion in 2000. And the core optical switching market is projected to grow $15 billion in Europe and North America by 2004 from approximately $544 million in 2000. Likewise, the component segment remains robust, and we do not believe that the component companies are facing an overbuild at this point. In fact, with the notable exception of the Nortel call, all indications are that the industry remains capacity constrained, despite continued increases in capacity. Estimates for the terrestrial DWDM component market have been raised for 2000 from approximately $2.5 billion to approximately $4 billion, according to RHK. And given the early introduction of certain new passive components in the market RHK estimates the 2000 terrestrial component market actual will be close to $5 billion — or, in other words, the equivalent of their original 2001 projection!. . . .
How to Make Money Out of Internet Bottlenecks
·_ Optical Components.
In terms of physical supply the complex hardware bottleneck of optical components is expected to remain for at least the next two to three years. Perhaps the main demand driver is the capacity of optical networking technologies (including DWDM, Optical Switches and Optical Cross-Connects) to reduce the provisioning time of service providers from months to weeks. We would look at JDS Uniphase/SDL (Strong Buy), CIENA (Buy), Sycamore Networks (Strong Buy), Adva (Buy) and Alcatel (Buy). . . . |
