Does this purchase have any implications for Lumenon (LUMM)?
From the Lumenon Thread...
Toronto, ONT, March 13 /SHfn/ -- Lumenon Innovative Lightwave Technology [LUMM] is a young, speculative fiber optics play that is still a relative unknown to investors. However, after unveiling its patented manufacturing process and its first fully packaged photonic chip product at the Optical Fiber Communication 2000 (OFC 2000) exhibition in Baltimore, Maryland, the company may appear on a few more radar screens. And Lumenon may be poised for some serious upside in the coming weeks if it makes the giant leap from the pinks to the NASDAQ.
"Analysts expect that the company will successfully make the move and that the NASDAQ listing could come as early as April."
For investors who got in before the pink sheet fiasco that saw Montreal-based Lumenon get bumped off the OTC BB, the last couple of months have been a trying exercise in patience and faith. Lumenon, along with a number of other companies, was caught out when the regulations covering trading on the OTC BB were tightened up and the company was forced to file new documents with the SEC in order to regain its OTC BB status. The company's more than $1.5 billion market capitalization while on the pinks did little to speed up the process, as the SEC made sure that it looked very closely at Lumenon's forms. Lumenon returned to the OTC BB on Thursday, March 9 (although with apparently only one market maker for the time being), and the company is now pushing for a NASDAQ listing as quickly as possible. Analysts expect that the company will successfully make the move and that the NASDAQ listing could come as early as April. With the conservative money staying away from stocks on the pinks and largely out of stocks on the OTC BB, the move to the NASDAQ would go a long way towards legitimizing an investment in Lumenon for potential investors intrigued by the company's technologies.
What Lumenon has been working feverishly on for the past year is an innovative, low-cost solution for mass production of its Dense Wave Division Multiplexing (DWDM) components. The company finally debuted its PHASIC manufacturing process as well as its first product, a fully packaged 100 GHz 8-channel optical waveguide, at OFC 2000. There were a lot of interested observers in and around the Lumenon booth in the exhibition hall, checking out both the process and the product, and the conference included all of the heavyweights in the optical networking space, including JDS Uniphase [JDSU], Nortel [NT] and Lucent [LU]. The interest was not surprising as DWDM components and companies were a hot theme throughout the conference.
DWDM technologies will likely be essential to the further development of fiber optic networks because they allow service providers to expand network capacity without laying more fiber optic cable. As a result, DWDM components are among the most anticipated fiber optics technologies coming to market. And not surprisingly, DWDM companies have been among the most sought after in the fiber optics space over the last few months. In December, Nortel [NT] paid more than $3 billion for Qtera at a time Qtera was still a research firm developing long-haul DWDM technologies, without any products or revenue. Around the same time, Cisco [CSCO] committed $2.15 billion to buy Pirelli's [PIREY] optical systems business and its DWDM expertise.
The challenge of producing DWDM components in volume drew many eyes to Lumenon at OFC 2000. Lumenon's packaged product specs indicate that its method of manufacturing low-cost optical integrated circuits is viable. And its PHASIC process offers the advantage of being able to rapidly adjust to new specifications. One of the company's strengths going forward will be the software layer in the manufacturing process that controls the design of the "mask" that imprints the circuitry on the photonic chips. Lumenon's process holds the promise of adjusting to a redesign in a week, where a traditional manufacturing process would take almost a month. Furthermore, the cost and time savings for building a manufacturing facility using Lumenon's processes seem compelling at this stage. Lumenon is currently building a $20 million plant that is expected to begin producing 500 chips per day by next summer. A semiconductor-style foundry typically costs between $1 and $2 billion to build and generally takes two or three times as long to come online. Lumenon currently plans to begin production within the next two months in its 20-chip-per-day facility, while preparing its second facility. If Lumenon can bring its second facility online within the expected time frame and can roll out 500 devices a day, there will almost certainly be a market for its products and variations thereof.
Initially finding a market for its products will not be a problem. The company currently has an agreement with Molex [MOLX] to test, package and market Lumenon's chips commercially to OEMs worldwide during the first year of production. The agreement is part of an equity financing arrangement that saw Molex take an equity stake in Lumenon. While Lumenon will receive a very low gross markup on its products during the first year of production as part of that arrangement, the Molex connection should help Lumenon gain a foothold with OEMs as a result of Molex's existing relationships.
Interestingly, in light of this deal, it was not the Molex packaged product that was on display in Baltimore at the Lumenon booth. Lumenon was clearly showing that it had overcome the packaging hurdle and was showing a Lumenon-branded, fully packaged product designed to meet Bellcore specs. Although production from the first year is locked in with Molex, Lumenon is free to initiate any partnerships or agreements it chooses, with the understanding that delivery could not begin until the first year of production is completed. A right of refusal clause in the Molex agreement that extends beyond the first year complicates this a little; but it is significant that Lumenon demonstrated the ability to produce a packaged product in house that met all the requirements for OEM suppliers. This was a definite milestone for the company and is a good sign that Lumenon will not be dependent on the Molex connection and is ready for the future.
"The product, and initially, probably the Molex-packaged product, will have to successfully complete field trials and prove that it can meet all of the Bellcore packaging standards."
Among the analyst community, Chris Bonnet of Groome Capital was impressed with the company's showing at OFC 2000. In an interview with StockHouse, Bonnet noted that "the company has a reduced risk profile because now it has a packaged product that it was able to show at the conference." Bonnet was in Baltimore and said the reception for the Lumenon product was very strong. The packaged product drew many eyes, and according to Bonnet, "Lumenon is basically telling the world that 'We are not handcuffed to this Molex agreement.'" Lumenon's production plans and the potential scalability of its manufacturing process were also a definite draw at the Lumenon booth. With few companies in the space and a great deal of demand for DWDM components and products, the challenge is to produce in volume and scale production to meet demand and many major players are struggling with this issue. Bonnet believes that the consolidation in the space will continue and that many big players are still hunting for the required technologies. Bonnet believes that JDS Uniphase for one, still has acquisitions to make, "in the type of technology Lumenon is present in." Lumenon's potential to ramp up production into large volumes is one of the distinguishing factors that sets it apart from many of its competitors.
On the competitive front it will be a hard fought battle. Among Lumenon's competitors are companies such as Kymata, Nanovation, Bookham and Avanex [AVNX]. Bookham also had a very successful OFC 2000 show, featuring a very similar technology to Lumenon's. And Avanex, which recently went public, has a market capitalization of more than $15 billion in addition to competitive technologies, making it a daunting foe. The youth of the market ensures that there is a long way to go before the space is sorted out and the winners emerge.
For Lumenon, there are still many hurdles to overcome if the company is to move beyond being a speculative play. The product, and initially, probably the Molex-packaged product, will have to successfully complete field trials and prove that it can meet all of the Bellcore packaging standards. This process is likely underway but until word is received that the product has successfully completed its trials, it will not be a viable commercial product. And, until Lumenon's second facility actually demonstrates that it can produce 500 devices a day, the claims that its production is rapidly scalable will remain unsupported. For the brave though, there may be a lot of upside yet to come from Lumenon and the NASDAQ listing will likely be the first test. If Lumenon starts appearing on NASDAQ radar screens there is no telling how brightly it could shine.
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