OT ---
Someone asked about ONI and I should probably post this on the Forbes ASAP thread where the question originated, but for obvious reasons I'd rather post my research here.
As most know, I have a lot of trouble with valuations of pre-IPO companies. When you consider SDLI paid $1.8 billion for PIRI, a company with 133 employees and $20 million in revenues in Q1/00 and 70% growth from '99 to '00, you have to wonder how ONI comes up with their valuation. They reportedly wouldn't take $8 billion before the IPO market collapsed and are now rumored to be reconsidering a private offer. They have 326 employees and $3.6M in revenues last quarter with $34.9 million in losses.
I have no problem with ONI as a company or with its progress to date. I'm only trying to look at the differences between them and the more mature PIRI, a company with solid on-going revenues, and the recent IPO, New Focus [NUFO].
PIRI from SDLI's recent press release:
<<<
SAN JOSE, Calif., May 10 /PRNewswire/ -- SDL, Inc. (Nasdaq: SDLI) announced today the signing of a definitive acquisition agreement with the shareholders of Photonic Integration Research, Inc. (PIRI) valued at $1.8 billion. PIRI, a privately held company located in Columbus, Ohio, is a leading manufacturer of arrayed waveguide gratings (AWGs) that enable the routing of individual wavelength channels in fiber optic systems. These products are used in optical multiplexing (mux) and demultiplexing (demux) applications for dense wavelength division multiplexed (DWDM) fiber optic systems. The acquisition expands SDL's traditional role as a leader in
active components in fiber optic systems to that of a leader in advanced passive components. Further, the acquisition of PIRI responds to the needs of SDL's customers going forward, by adding a critical silicon wafer based optical integration technology which is expected to improve performance and lower costs in next generation DWDM systems.
. . . PIRI will continue to operate as a wholly owned subsidiary of SDL, Inc.In the quarter ended March 31, 2000, PIRI achieved revenues in excess of $20 million and currently has 133 employees.
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ONI's S-1 filing:
sec.gov
1) number of shares outstanding:
Common stock offered............. 8,000,000 sharesCommon stock to be outstanding after this offering............. 123,877,066 shares
2) patent infringement suit [unlike many patent infringement suits, this one may be significant].
In March 2000, Nortel Networks filed suit against us in the United States District Court for the Northern District of California. The suit alleges that our products infringe five patents held by Nortel Networks, and sets forth allegations of misappropriation of trade secrets, unlawful business practices and common law unfair competition. We are in the preliminary stages of investigating these allegations.
3) $3.6M in revenues last quarter, and $34.9 M in losses:
[financial table comes up skewed, so check the S-1]
sec.gov
4) Employee compensation [included as I noticed a wide difference between ONI and NUFO]:
The table does not include compensation information for three executive officers who commenced employment after December 31, 1999. These three officers would have been among the five most highly compensated executive officers had they been employees of ONI Systems in 1999. Chris A. Davis, our Executive Vice President, Chief Financial and Administrative Officer, commenced employment with ONI Systems on May 1, 2000. Ms. Davis' salary on an annualized basis for 2000 is $400,000, which does not include a $300,000 bonus received upon commencement of employment. Robert J. Jandro, our Executive Vice President, Worldwide Sales and Marketing, commenced employment with ONI Systems on March 1, 2000. Mr. Jandro's salary on an annualized basis for 2000 is $295,000, which does not include a $200,000bonus payable upon the satisfaction of established performance goals. Andrew W. Page, our Vice President, Corporate Development, commenced employment with ONI Systems on February 29, 2000. Mr. Page's salary on an annualized basis for 2000 is $300,000, which does not include a $30,000 bonus received upon commencement of employment. . . .
In May 2000, we granted to Chris A. Davis, our new Executive Vice President, Chief Financial and Administrative Officer, an option to purchase 1,000,000 shares of common stock outside of the stock plans described in this prospectus with an exercise price of $4.00 per share. This grant will result in additional deferred stock compensation of $10.0 million, which will be amortized over four years from the date of grant. In connection with options to purchase an additional 1,680,000 shares of common stock at a weighted average exercise price of $10.41 per share, granted from April 1, 2000 through May 15, 2000, we have an additional deferred compensation expense of $6.2 million. [Would love to see a broader comparison of CFO compensation packages.]
5) Sales data:
As of December 31, 1999, our ONLINE9000 product was undergoing field trial testing and was not generally available for sale; accordingly, no product revenue was recorded. . . .
On January 31, 2000, we announced general availability of our first product, the ONLINE9000, which we began to ship in February 2000. In March 2000, we recognized revenue from sales of this product to four customers. For the three months ended March 31, 2000, sales to Williams Communications, Inc., COLT Telecom plc, Marietta Fibernet and StorageNetworks, Inc. accounted for 33%, 30%, 23% and 14% of revenue, respectively.
. . . .
6) Employees:
As of March 31, 2000, we had a total of 326 employees:
147 in research and development;
. 41 in sales and marketing;
. 18 in customer service and support;
. 68 in manufacturing; and
. 52 in finance and administration.
7) Balance sheet:
December 31, 1998 December 31, 1999 March 31, 2000
Cash and cash equivalents................ $19,092 $ 80,023 $50,307
Working capital.......................... 19,627 81,758 59,101
Total assets............................. 21,312 100,942 95,869
Capital lease obligations, less current portion .... 79 367 295
Total stockholders' equity............... $20,565 $91,728 $78,699
8) Accumulated debt:
As of March31, 2000, we had an accumulated deficit of $89.8 million.
9) Patent portfolio:
We have been issued six patents in the United States. However, only two of these patents are currently significant to our products. In addition, we currently have 16 patent applications pending in the United States and
internationally. These patents relate to optical architecture, hardware, software and management systems.
10) Director from Williams, noted for huge personal gains from Sycamore:
Matthew W. Bross has served as a director of ONI Systems since November 1999. Since May 1999, he has served as Senior Vice President and Chief Technology Officer of Williams Communications, Inc., a communications service provider. From March 1997 to May 1999, he served in various management capacities for Williams Communications. From 1991 to March 1997, he served as the founder and Chief Executive Officer of Critical Technologies, Inc., a
telecommunications infrastructure company, which was acquired by Williams Communications.
11) Products:
oni.com
Now, compare to New Focus [NUFO]:
1) ten years experience:
We design, manufacture and market innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks brand. We leverage our ten years of experience in developing advanced optical products to enable networking solutions with increased channel counts, higher data rates, longer reach lengths and new services, and which reduce overall network cost of ownership. Our high performance products are compact, consume less power and are designed to be manufacturable in high volumes. We sell our products to over 50 customers including Agilent Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks Corporation. . . .
2) Telcordia qualified, and just recommended for ISO-9001:
We are committed to designing and manufacturing high quality products that have been thoroughly tested for reliability and performance. We perform extensive in-house testing to industry accepted Telcordia, or Bellcore,
standards and have also been recommended for ISO-9001 quality certification. Our in-house manufacturing capabilities include optical assembly, integration and
testing of our fiber optic products and advanced photonics tools. To meet the growing demand for our products, we are continuing to expand our manufacturing capacity while leveraging our capabilities in rapid prototyping, automation, proprietary tools and processes.
. . .
3) Shares outstanding:
Common stock offered.................. 5,000,000 shares
Common stock to be outstanding after this offering ---
58,342,884 shares. . .
4) Revenues:
Net Revenues for 1999: $17.285 million
Net Losses for 1999: (4,971) or ($2.18) per share
Three months ending March 31 1999 and 2000:
Revenues: $ 4,741 $ 9,782
Net Losses: (1,596) (12,461)
Loss per share: $ (0.66) $ (2.12)
Pro forma loss per share: $ (0.07) $ (0.26)
5) Balance Sheet, Actual and Pro Forma:
Cash and cash equivalents.. $12,392 $90,287
Working capital ... 16,461 94,356
Total assets ... 40,386 118,281
Long term debt, less current portion ... 315 315
Total stockholders' equity . . . 28,868 106,763
6) Accumulated debt:
As of March 31, 2000, we had an accumulated deficit of $28.0 million.
7) Customer weighting:
In the three-month period ended March 31, 2000, Corvis Corporation and Agilent Technologies accounted for 17.8% and 14.3% of our net revenues, respectively. In the nine-month period ended December 31, 1999, none of our customers accounted for more than 10% of our net revenues. We
anticipate that our operating results will continue to depend on sales to a relatively small number of customers. The loss of any of these customers or a significant reduction in sales to these customers could adversely affect
our revenues. . . .
For the nine-month period ended December 31, 1999, sales of our telecom products accounted for 27.6% of overall net revenues. For the three-month period ended March 31, 2000, sales of our telecom products accounted for 49.9% of overall net revenues and are expected to continue to increase as a percentage of our overall net revenues. We sell our products to over 50 customers including Agilent Technologies, Alcatel USA, Avanex Corporation, Corning Incorporated, Corvis Corporation, JDS Uniphase Corporation, Lucent Technologies, and Nortel Networks Corporation. In the nine-month period ended December 31, 1999, none of our customers accounted for more than 10% of our net revenues. In the three-month period ended March 31, 2000, Corvis Corporation and Agilent Technologies accounted for 17.8% and 14.3% of our net revenues, respectively. None of our other customers accounted for more than 10% of our net revenues for the three-month period ended March 31, 2000.
8) Employees:
At March 31, 1999, we had a total of 151 employees and at March 31, 2000, we had a total of 578 employees.
9) Product weighting:
We derive a substantial portion of our net revenues from a limited number of products. Specifically, in the nine-month period ended December 31, 1999 and the three-month period ended March 31, 2000, we derived 13.9% and 22.0%,
respectively, of our net revenues from our tunable laser module products. We expect that net revenues from a limited number of products will continue to account for a substantial portion of our total net revenues. Continued and widespread market acceptance of these products is critical to our future success. We cannot assure you that our current products will achieve market acceptance at the rate at which we expect, or at all, which could reduce our net revenues.
10) Legal proceedings:
We may from time to time become involved in various lawsuits and legal proceedings which arise in the ordinary course of our business. For example, in March 2000, a former employee filed a complaint against us. We believe
that this claim is without merit and that the resolution of this claim will not have a material adverse effect on our financial condition. As a result, we have not accrued for the possible unfavorable outcome of this litigation.
However, litigation is subject to inherent uncertainties, and an adverse result in this or other matters that may arise from time to time may adversely impact our operating results or financial condition. Any litigation to which we are subject could require significant involvement of
our senior management and may divert management's attention from our business and operations. . . .
U.S.A. Kaifa Technology, Inc., recently acquired by E-Tek Dynamics, Inc., filed a complaint against us in December 1999 in the United States District Court for the Northern District of California, alleging, among other things, that we have infringed some of their intellectual property rights. We cannot be certain that we will be successful in our defense. . . . On February 23, 2000, we filed a motion to dismiss several of Kaifa's claims. On the same date, our employees named in the complaint also filed motions to dismiss Kaifa's complaints against them. . . .In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We are currently defending a claim alleging that we are violating a third party's intellectual property rights.
>>>
11) Capitalization:
Total capitalization (in thousands0 Actual, Pro forma, Pro forma adjusted:
............................... $ 29,183 $ 29,183 $107,078
12) Product development agreements:
a) Agilent:
In 1996, Agilent found that they required a low-cost tunable laser for testing long-range optical equipment. In that year, we began collaborating with Agilent for the development of a low-cost tunable laser product. From 1996 to 1999, we developed a low-cost tunable laser according
to Agilent's needs. In addition to funding a portion of this project, Agilent agreed to begin commercial purchase of our low-cost tunable laser product. We delivered the first product, a tunable laser module along with the associated control electronics, in the second half of 1999. To date, we have experienced a great deal of success with our tunable laser modules as well as with the development of advanced tunable laser products. By incorporating our
products, Agilent has been able to offer a broader line of tunable lasers for their customers at more competitive prices than previous solutions.
b) Alcatel:
In 1998, we first developed the intellectual property for design and production of a circulator that allows wider wavelength range, lower loss, and more compact size than previously available products. In early 1999, Alcatel took delivery of a beta test version of this product, concluding a number of very successful tests. Alcatel presently deploys our circulator products to enhance the performance of their systems.
c) Avanex:
Avanex is a provider of photonics processors for optical networks. Avanex requires highly reliable tunable lasers to use as an integral part of their manufacturing process. Our products address these needs in two areas. First, we supply the tunable test lasers that are incorporated into Avanex's standard production line. Our tunable test lasers have allowed Avanex to decrease the calibration time required at each station. Second, our swept wavelength lasers are being incorporated into production lines for Avanex's next generation high performance devices. Our technology allows faster optimization for the device in production.
d) Corning:
In order to meet the need for higher power amplifiers driven by increasing channel counts in WDM networks, Corning developed a complex, high-end fiber amplifier product that required a number of circulators. In 1998, we first developed the intellectual property for design and production of a circulator that allows higher channel counts than previously available products. In early 1999, Corning took delivery of a beta test version of this product, concluding a number of successful tests. Corning presently deploys our circulator products to enhance the performance of their fiber amplifier products and to allow for more complex fiber amplifier architectures demanded by Corning's customers.
e) Qtera:
Qtera Corporation, a wholly owned subsidiary of Nortel Networks, is a provider of extremely long reach, high power network solutions. In developing these solutions, Qtera had a need for a packaging solution for one of the key components used in their system. This package was required to pass rigid Telcordia testing. We used our existing intellectual property and developed new intellectual property that solves the packaging problem and addresses Qtera's needs. We consider this technology to be a core competency. In addition to enhancing Qtera's product offerings, we have leveraged this technology to supply to other systems vendors. Qtera's deployment of this technology will provide carriers with increased power and signal transmission distance, reducing the number of regeneration points in a network.
13) Management compensation:
(1) Kenneth Westrick's annual compensation for the twelve months ended December 31, 1999, was $227,869.
(2) George Yule's annual compensation for the twelve months ended December 31, 1999, was $192,580.
(3) Paul Smith's annual compensation for the twelve months ended December 31, 1999, was $193,533.
(4) We entered into a separation release agreement with Laurie Conner on December 16, 1999, pursuant to which Ms. Conner's employment relationship with us terminated as of February 15, 2000, and she continued to receive salary through her termination date.
(5) Laurie Conner's annual compensation for the twelve months ended December 31, 1999, was $155,000.
(6) Dr. Day's annual compensation for the twelve months ended December 31, 1999, was $167,814.
14) List of products
newfocus.com
15) Intellectual property:
Our success and ability to compete depend substantially upon our technology. We pursue patent protection in the United States and abroad, and as of March 31, 2000 we have been granted 26 U.S. patents and one European patent. As of March 31, 2000, we have 28 U.S. utility filings,
of which three have been allowed by the U.S. Patent and Trademark Office, 12 U.S. provisional filings and nine overseas filings in various stages of prosecution, and we continue to file new patent applications in the United
States and overseas. The expiration dates of our patents range from May 25, 2009 to September 15, 2017.
16) Employees:
At March 31, 2000, we had a total of 578 employees located in both the United States and the People's Republic of China. Of the total, 421 were in manufacturing, 77 were in research and development, 27 were engaged in sales
and marketing, 53 were in administration. None of our employees are subject to a collective bargaining agreement and we believe that our relations with our employees are good.
17) Facilities:
Our corporate headquarters facility, of approximately 55,000 square feet, is located in Santa Clara, California. We lease our corporate headquarters facility pursuant to a lease agreement that expires in April 2005. We are also expanding our operations in California to a second facility of 52,000 square feet in San Jose. In May 2000, we entered into an eight-year sublease with Komag, Incorporated for 59,000 square feet in San Jose. Under this sublease we have obligations for $10.1 million in lease payments over the eight year term. In addition, in May 2000 we entered into negotiations to lease an additional facility of 130,000 square feet, also in San Jose. Under this proposed lease we would incur approximately $25.0 million in lease payments over the seven year term.
We also have facilities in Wisconsin. We lease approximately 2,000 square feet of space in Madison, Wisconsin under a lease agreement that expires December 2000. We are also leasing approximately 2,500 square feet in Middleton, Wisconsin, pursuant to a lease agreement that expires November 2000 or, upon our occupation of a 14,000 square foot facility, pursuant to a new lease agreement that expires in 2007.
We have established a manufacturing facility in Shenzhen, China located on land leased from China's government by the Shenzhen New and High-Tech Village Development Co. under land use certificates and agreements with terms of 50 years. We lease this manufacturing facility from the Shenzhen New and High-Tech Village Development Co. under a lease agreement that will expire in November 2002, subject to our option to renew for an additional three-year period.
The size of this facility in Shenzhen, China is approximately 20,000 square feet.
In addition, in April 2000 we entered into an agreement to acquire a second facility in Shenzhen, China. We purchased approximately 43% of this facility in Shenzhen and will lease the remainder of the facility for a term of five
years from the Shenzhen Libaoyi Industry Development Co., Ltd. with an option to purchase the leased portion of the facility during the first three years of the lease term. The size of this facility is approximately 268,000
square feet.
>>>>>>
The following information doesn't really pertain to the comparison but is helpful in analyzing the industry and how NUFO fits in:
Current Internet Usage data:
The Internet has become an essential communications and transaction medium. The volume of high-speed data traffic over communications networks continues to grow dramatically, outpacing that of traditional voice traffic. According to International Data Corporation, a leading market research company, the number of Internet users worldwide reached approximately 142 million in 1998 and is forecasted to grow to approximately 502 million users by the end of 2003. According to Ryan, Hankin & Kent, a leading market research and consulting firm, Internet and other data traffic is expected to increase 8,100% between 1999 and 2003. This growth is primarily attributable to the
increasing use of the Internet among consumer and business users, easier and cheaper access to the Internet and the large and growing number of personal computers in the home and the workplace. E-commerce in particular is generating enormous data traffic over communications networks as it becomes a critical strategic element of many businesses.
Excellent description of optical networks:
Optical networks transmit data by pulses of light through an optical fiber. Light in a glass medium can carry more information over longer distances than electrical signals over a copper medium. Optical signals are generated
through the use of lasers that produce light at specific colors, or wavelengths. In addition to lasers, a variety of other fiber optic components are used to create, combine, isolate, amplify, split, channel and perform various other functions on these optical signals. Fiber optic components are split into two broad categories: actives, or opto-electronics, which process both optical and electrical signals and passives, which process only optical signals.
Innovations at the fiber optic component level have historically enabled a number of major advances in optical networking systems.
Traditionally, optical signals at only a single wavelength, or channel, were used to carry information in optical networks. With the invention of innovative components capable of separating light into different specified
wavelengths for transmission in an optical fiber, network systems vendors began developing enhanced equipment, including wavelength division multiplexing, or WDM, systems, which greatly increased network capacity
based on these new components. WDM solutions increase network capacity by transmitting data simultaneously on a number of different wavelengths along the same optical fiber. At the destination, these wavelengths are separated
and the data extracted. Therefore, WDM technology increases the bandwidth of an optical network proportional to the number of different wavelengths that aretransmitted.
In addition to increasing the number of channels, component innovation has also resulted in an increase in the amount of data which can be transmitted per channel, or data rate. Network service providers have been continually upgrading the data rates of their optical networks, for example, from OC-3, or 155.5 megabits per second, to OC-48, or 2.5 gigabits per second. Service providers today are beginning to deploy OC-192, or 10 gigabits per second, equipment
throughout their networks and are in the early stages of developing and testing equipment with OC-768, or 40 gigabits per second, capability, creating a need for innovative components in optical testing equipment capable of operating at these high speeds. With increased data rates and number of channels, the amount of data processed by network equipment has increased dramatically. As the
data rate and bandwidth between network equipment sites has expanded, the data rate between the equipment within these sites has not kept pace. As a result, there is increasingly a need for high data rate, or high-speed, connections to link the equipment within a network service provider's site.
Component innovations have also led to the development of the fiber amplifier, which enhances the strength of optical signals, resulting in a dramatic increase in the distance over which optical signals can be transmitted without regeneration, which is the process of converting the
signals from optical to electrical and back to optical to restore signal quality and strength. Regeneration requires large, expensive equipment, often in remote locations, which can be costly to deploy, operate and maintain. Fiber amplifiers restore the signal strength without regeneration
and result in significantly lower equipment, operations and maintenance costs. Prior to the development of fiber amplifiers, signal attenuation, or loss, limited the distance over which an optical signal could be transmitted without regeneration, or reach, to approximately 70 kilometers. With fiber amplifiers, the reach of optical
networks has increased to thousands of kilometers. With improvements in fiber amplifiers, network equipment manufacturers are continuing to develop longer reach capability that has led to, among other things, all-optical
networks that operate without any regeneration. These all-optical networks depend on advanced fiber optic components that enable extremely long reach.
Requirements of Optical Communications Systems
The increasing need for bandwidth has resulted in strong demand for optical networking systems and a proliferation of new development efforts by traditional and emerging network equipment providers. These providers are
seeking to develop next-generation optical networking systems, which require:
Increased channel counts. Service providers are demanding optical networks with higher channel counts to increase bandwidth. However, with current WDM technology, the number of wavelengths that can be transmitted, or channel
count, is limited. Current WDM technology requires that data be transmitted within a defined range of wavelengths and with a large space between each channel. These
limitations constrain the channel count and the overall bandwidth. Network equipment providers can increase the channel count by extending the range of wavelengths over which data can be transmitted. At the same time, the
channel count can be increased by reducing the spacing between channels with dense wavelength division multiplexing, or DWDM, which is a technology that
increases network capacity by transmitting data simultaneously on many densely packed wavelengths along the same optical fiber. According to Ryan, Hankin & Kent,
the market for DWDM optical components is expected to grow at a compound annual growth rate of 51% from 1999 to 2003. As wavelength range and channel counts increase, service and network equipment providers will also need to
effectively manage the increasingly complex flow of high speed optical signals in a vast number of wavelengths.
Higher data rates. Future systems will continue to require higher data rates to handle the rapid growth in data traffic. Next-generation optical networks are being developed with data rates of OC-192 and OC-768. As higher
speed optical networking systems are being developed, service and equipment providers will need test and measurement equipment that is faster than the products being measured in order to ensure accurate testing of the
equipment. In addition to increasing data rates between network equipment sites, network service providers are demanding an increase in data rates between network
equipment, such as between routers, switches and DWDM terminals and other equipment, within a site. As a result, service and network equipment providers are demanding a large number of short-reach, high data rate interconnections.
Longer reach.
The varied and unpredictable geographical pattern of Internet data traffic requires longer reach networks. Regeneration stations are expensive and are costly to deploy, operate and maintain. As a result, service providers are demanding optical networks with longer reach between regeneration stations. Very long reach is ultimately needed for all-optical networks that do not require regeneration.
Enabling new services.
Competition among service providers is driving the need to provide differentiated services. Similar to the introduction of systems that increased the bandwidth and reach of current networks, there is a need for network equipment capable of managing and flexibly delivering this
bandwidth at the fiber optic component level. Traditional methods of managing bandwidth by converting optical signals to electrical signals for processing are limited to a
specific protocol and data rate. When processing is performed entirely in optics without the conversion to electronics, the processing is independent of the protocol and data rate.
Cost-effectiveness.
Growth in data traffic and price competition in the telecommunications market increasingly requires service providers to seek solutions that reduce their overall network cost of ownership. In addition to the basic cost of
equipment, service providers incur substantial costs in terms of space required to deploy the equipment, power consumption and on-going operations and maintenance. In order to continue to grow and upgrade their networks to
meet higher traffic demands in a cost-effective manner, service providers need compact, low-power consuming equipment.
>>>>>>>>>
It's obvious SDL made a brilliant acquisition. It's also obvious NUFO is a far stronger company than ONI and if you've followed my analysis of AVNX, you'll note NUFO and ONI are both stronger in comparison. Paradoxically, at Friday's close AVNX's market cap was $4.08 billion and NUFO's $2.76 billion. And as of recent press releases, ONI was hoping for at least $6 billion.
This comparison is not complete nor is it scientific. There are other factors to consider, including market potential of specific products, management teams, timing of certifications, and so on.
By way of disclaimer, I have a tiny position in NUFO, simply b/c Chase H&Q were one of the underwriters and after talking to the company at OFC and being impressed with their tunable laser technology, I'd put in a request for the IPO.
If anyone finds more on ONI, or NUFO for that matter, either post here or direct me elsewhere. I'll be back on Tuesday.
Pat |
