bloomberg article
Lumenon Shares Outpace Others in Fiber-Optic Equipment Industry
Lumenon Shares Outpace Others in Fiber-Optic Equipment Industry
Dorval, Quebec, Sept. 19 (Bloomberg) -- Investors busy snapping up shares of fiber-optic equipment
makers JDS Uniphase Corp. and E-Tek Dynamics Inc. this year could have bettered their returns of
triple or more by betting on a little-known rival.
Shares of Lumenon Innovative Lightwave Technology Inc., which started the year at 1/4, have
rocketed to 9 1/16, a gain of 3,525 percent. Even though it's losing money and has no sales,
Lumenon boasts a market value of more than US$300 million. At one point last week, the stock
touched 12 3/32.
What turned a startup whose shares trade over the counter into a hot prospect? Lumenon, based in a
Montreal suburb best known for its airport, developed a new breed of semiconductor that could boost
the capacity of fiber-optic networks for a fraction of what it costs with components from JDS Uniphase.
'This is like another Intel,' said Ron Perry, vice president of business development at Lumenon
investor Manitex Capital Inc., referring to No. 1 computer-chip maker Intel Corp. 'The potential is
huge.'
Enthusiasm is mounting as phone companies spend billions of dollars to create room on their networks
for mushrooming data traffic and Internet use. Some are grappling corporate data that's doubling their
own growth estimates, said Mat Steinberg, a director at Ryan Hankin Kent Inc., a San Francisco
market researcher.
The most popular way to unclog the pipes is dense wave- division multiplexing, or DWDM, technology.
DWDM combines the beams from different lasers on a single strand of fiber. Ryan Hankin Kent
estimates that sales of DWDM equipment will climb to about US$3 billion this year from US$1.8 billion
last year and increase another 60 percent in 2000.
With its new chip, Lumenon could get a big slice of that business. The company intends to begin
shipments early next year.
Silicon Sandwich
Lumenon Chief Executive Iraj Najafi said the chip, which is smaller than a playing card, accomplishes
what components half the size of a refrigerator do now. Using optical circuitry for DWDM instead of
traditional chip technology, Lumenon's product combines the laser beams in a sandwich of glass and
silicon.
DWDM is popular because it's cheaper than installing new fiber, the glass that's replacing older copper
wires in telecommunications networks. Carriers use DWDM when they need to add capacity on a
stretch of fiber more than 15 miles (24 kilometers) in length.
For long-distance use, DWDM is the only choice. Rights of way, construction permits and the cost of
digging up the ground to install new fiber are prohibitive.
So far, those constraints have benefited JDS Uniphase and E- Tek, the biggest suppliers of filters and
other parts for the electronic DWDM systems made by companies such as Nortel Networks Corp.,
Alcatel SA and Lucent Technologies Inc.
JDS Uniphase, based in San Jose, California, has increased sales by at least 41 percent from the
year-earlier period every quarter for the past four years. Its market value has soared to $18.62 billion
from $2.94 billion at the beginning of the year, before the former Uniphase Corp. acquired JDS Fitel Inc.
E-Tek, also based in San Jose, has surged, too, quintupling since a Dec. 2 initial public offering at $12
a share.
Lumenon will begin selling its chips only through Molex Inc., a maker of electronic and fiber-optic
connectors that has a 25 percent stake in the company.
Lumenon raised almost US$10 million in private financing. It's also gained the attention of Cisco
Systems Inc., the No. 1 network-equipment maker, which has an employee on Lumenon's technical
advisory committee.
Corporate backing alone isn't enough to convince Ryan Hankin Kent's Steinberg that Lumenon's chip
really works. He wants to see the company win contracts first. 'We've all been skeptical about people
making optical chips,' he said. 'It's the holy grail.'
Sales Explode
Such reservations haven't stopped optimism for growth in the fiber-optic industry from spreading to
other equipment makers. Shares of JDS Uniphase rival SDL Inc., which produces the modulators used
to code information for optical networks and the lasers to amplify it, have quadrupled this year.
Its business is exploding because a DWDM system can only increase capacity based on the number
of modulators used. If a phone company wants a 32-fold boost -- and most do -- it needs to buy 32
modulators for each piece of fiber as well as pump lasers and related equipment to amplify the beam
along the networks. 'As the need for bandwidth goes up, the need for more fiber- optic equipment
grows,' said David Karson, an analyst at Black & Co.
Optical Coating Laboratory Inc. is another company riding the wave of spending on fiber-optic
components. It makes specialized coatings that influence the way light travels and supplies JDS
Uniphase with optical filters used in DWDM systems. Its shares have tripled this year.
Nortel and Lucent, as the biggest sellers of DWDM equipment to phone companies, sit atop the
components' food chain. They buy from JDS Uniphase, SDL and their rivals. Shares of Nortel, whose
optical-networking sales rose by more than 50 percent in the first half of the year, have almost doubled
since Dec. 31. Lucent has gained 27 percent, compared with an 8.7 percent rise for the Standard &
Poor's 500 Index.
Networking Chips
Even though his company has still to ship its first chip, Najafi is planning to extend Lumenon's reach
beyond DWDM. He wants to break into the market for networking chips, which sit inside the
equipment that sends data between computers.
Networking chips rival fiber optics in terms of investor enthusiasm. Driven by sales of routers and other
equipment made by companies such as Cisco to direct Internet and data traffic, the shares of
chipmakers Broadcom Corp. and Applied Micro Circuits Corp. have taken off.
Applied Micro has risen eightfold this year. Broadcom, Xylinx Inc., Connexant Systems Inc., PMC-Sierra
Inc., Analog Devices Inc. and Vitesse Semiconductor Corp. have tripled or more in the past 12 months.
All make networking semiconductors or specialty chips used in telecommunications.
Najafi said the cost of making his chip is so low, it opens the door to putting the device in places where
optical networking isn't yet possible. 'This is technology produced at such low cost levels, it should be
used in personal computers,' he said.
With prospects like that, Najafi is expecting a big telecommunications-equipment maker to make an
offer to buy Lumenon soon. He's also applying for a Nasdaq Stock Market listing. 'Right now, we're
just enjoying what's going on,' he said. 'But maybe tomorrow or a month from now, someone's going to
knock on our door.'
Najafi said no company has made a formal bid so far, though many have visited Lumenon's plant and
offices, which overlook a jet hanger across the road at Montreal's Dorval airport. |
