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Technology Stocks : SDL, Inc. [Nasdaq: SDLI] -- Ignore unavailable to you. Want to Upgrade?

To: Wyätt Gwyön who wrote (1330)	5/11/2000 10:52:00 AM
From: pat mudge	Read Replies (1) \| Respond to of 3951

More from Chase H&Q report on PIRI: Announces PIRI acquisition: Yesterday, SDL announced its intent to acquire Columbus, Ohio based Photonic Integration Research, Inc. (PIPI) for $1.8B, $31.25 in cash and the remainder in stock with the exact share count tied to the stock price at closing. At the current share price, this would be equivalent to $1.2M shares. The acquisition has been approved by PIRI's shareholders and SDL expects closure sometime in June, pending government and regulatory approval. With the acquisition, SDL will gain access to approximately 100 patents (US and international) on a perpetual, non-exclusive basis. PIRI Company Profile: PIRI was established in 1987 by Battelle, Mitsubishi Corp., and NTT Corp, and is presently owned by the three founders. The firm designs and fabricates Array Waveguide Gratings (AWG) and related technologies for fiber optic communications equipment. PIRI's headcount is 133, with between 15-20 engineers and facilities totaling 36,000 square feet. We believe the vast majority of PIRI's sales ae to Lucent. With the 400G, Lucent is the only system vendor in volume production on AWG-based transport gear. SDL indicated it is comfortable with prospects in future Lucent boxes and other customers. To date, PIRI has been managed conservatively, more for profitability than for growth. PIRI is presently running only one shift and is working at full manufacturing capacity. Another 20,000 feet of capacity is due to come on line in Q4, at which time we expect quarterly sales to well exceed $30M based on current customers. Additionally, management has plans for an additional 60-70K sq. ft. We believe SDL will rapidly work toward the addition of another shift in addition to capacity. Given the market opportunity, SDL should be well positioned to address the AWG market opportunity. AWG and Alternative Filtering Technologies: DWDM systems essentially multiplex (combine) and demultiplex (separate) a number of optical signals, each at a different wavelength, on a single fiber optic cable. These systems can use various multiplexing technologies, such as thin-film filters (TFFs), arrayed waveguides (AWGs), or fiber bragg gratings (FBGs). Currently, TFFs, such as those manufactured by JDS Uniphase through its OCLI acquisition are the most prevalent technology, although Ciena, a DWDM system innovator, primarily uses FBGs. While TFFs and FBGs are manufactured in batches according to wavelength, AWGs are manufactured on wafers, usually constructed of silica. One of the most important metrics for optical systems is insertion loss. The losses associated with TFFs and FBGs per channel (one fiber per channel) are low, but these technologies are often cascaded. Consequently, as system channel counts grow, so do losses. Alternatively, the loss in AWG is essentially independent of channel count. This loss can be thought of as a "fixed cost" associated with coupling the fibers to the AWG. So as systems continue to become denser, AWGs make more sense, both from optical loss and manufacturing perspectives. Waveguide technology can also be applied in other optical components, such as variable optical attenuators (VOAs), switches, and splitters. Individual components can be combined on a single wafer to construct integrated subsystems, such as add/drop multiplexers. The two most prevalent technologies used to manufacture AWGs are flame hydrolysis (FH) and chemical vapor deposition (PECVI). While each technology has advantages and disadvantages, either can work well. In addition to these two methods, Bookham uses silicon. While silicon can be advantageous from a manufacturing perspective, it is inherently "lossy" and can present other problems due to the optical differences between the fiber itself (silica) and the silicon waveguide. IOT, which is now wholly owned by JDS Uniphase, uses an ion deposition process, which can be difficult to manufacture. (still typing. . .)

To: Wyätt Gwyön who wrote (1330)	5/11/2000 11:12:00 AM
From: pat mudge	Read Replies (2) \| Respond to of 3951

An emerging market opportunity. According to RHK, the market for AWGs in 2003 will be $1.2B with an expected CAGR for product shipments of 65% from 1999 through 2003 (45% CAGR for sales). Additionally, RHK believes this will be 43% of the total 2003 WDM market, which implies a $2.8B mux/demux market opportunity. Piri is the market share leader in AWGs, but competition is intensifying. Competitors in the AWG market include NEL and Hitachi in Japan, Nortel, Siemens, IOT (wholly owned by JDSU), Bookham, and Alcatel in Europe. We also believe Corning is in the process of building an AWG fab and JDSU (aside from IOT) is pursuing this technology as well. To our knowledge, the only competitors in commercial production at this time are PIRI, Hitachi, NEL, Bookham, and Lucent, although Lucent continues to have difficulty with its process. Additionally, we believe Lightwave Microsystems is close to commercial production. Separately, we believe this bodes well on the margin for the E-TEK/JDSU merger as the level of competition in the passives market continues to increase, especially from alternative technologies. Immediately accretive and strategically significant. Management indicated that PIRI's gross and operating margins are higher than SDL's. While we are not changing our model until the closing of the deal, we expect it to be materially accretive. PIRI sales totaled $57M in CY'99 and exceeded $20M in Q1:00, all from AWGs, and we believe $125-150M in sales in CY:00 is possible. Assuming a 77M SDLI share count and the issuance of 11.2M new shares, FY:01 profit from PIRI could be $0.12-$0.15. However, until closing, our estimates remain $379M/1.07 for FY:00 and $575M/1.43 for FY:01. With respect to valuation, as potentially less than 10x next years's sales, it is reasonable on a relative basis. With the acquisition of PIRI, SDL has opened up a tremendous new market opportunity in the area of passive optics.l While SDL has had some passive expertise after its 1995 acquisition of SeaStar Optics technology from the acquisition has been used only for grating stabilizers for its pump modules. We believe the PIRI acquisition is very significant, especially given the focus on next generation passives and their potential for rapid growth. When combined with the Company's earlier acquisitions of IOC, Veritech, and Queensgate, SDL adds yet another important product category and strengthens its position for next-generation optical systems. We reiterate our BUY recommendation on SDLI shares. >>> Looks like the market's figuring out the significance of this acquisition. Up 16 3/8 as we speak. When Don and Dave told me at OFC they would stay on the leading edge of technology --- and acquire critical pieces as needed --- they weren't kidding. Pat Pat