un autre rating buy cette fois
Electro-Optical Engineering Initiating Coverage --
10:28am EDT 25-Jul-00 Wit SoundView (Kevin Slocum 203-462-7219) EXFO
Electro-Optical Engineering INc. (EXFO) Price: $84.63 Buy July 25, 2000
(FYE Aug.) F99 F00 F01 Curr. Last Yr. Ago
Revenue ($M) 42.1 68.0 97.1 19.5 19.4 12.5
EPS $0.15 $0.24 $0.33 $0.06 $0.07 $0.05
We are initiating coverage of EXFO Electro-Optical Engineering Inc with a buy
rating. Strong price appreciation off of the initial public offering leave us
more inclined to build positions on pullbacks.
EXFO supplies test, measurement and monitoring equipment to the fiber optic
industry. Optical test, measurement and monitoring equipment is used for
network installation, maintenance, repair, monitoring and manufacturing as well
as component manufacturing and research and development. EXFO's equipment is
focused on the physical test of light as it passes through optical networking
equipment. EXFO supplies into two markets including the handheld and portable
market and the scientific and industrial market. In the handheld equipment
market, many of its products have the number one market share position.
EXFO was formed in 1985 as a bootstrap-startup by its two founders. The company
had the original vision of becoming the leading supplier of fiber optic test and
measurement systems for network operators and the component and system
suppliers that support them. EXFO has emerged as the number one supplier in the
hand held market and as a leading supplier of bench top fiber optic test and
measurement systems for the rapidly growing communications market.
Optical fiber manufacturers, cable manufacturers and installers need to perform
tests on the fiber during the manufacturing and installation process.
Technicians check the physical properties of the fiber, such as how the light
travels over the fiber, in comparison to the specifications that it was
manufactured for. Installers test, validate and document the tests on the fiber
to qualify it to be "lit". On the optical system and component side, 60% of
manufacturing time is spent in test and these parts and systems have to be
qualified and characterized.
Highlights
* A worldwide customer base that includes 80% of the world's 500 largest telecom
companies
* 14 years of growth and profitability
* Stable financial model driven by a diversified customer base and a growing
product line
* Over 60 different products and instruments
* At the doorstep of an accelerating ,market opportunity with the latest 2
quarters providing ample evidence of the point given an acceleration in growth
toward the 80% level
Risks
* Appearance of a lumpy business
* Lower expected gross margins and nominal forecasted sequential revenue growth
during fiscal 4th summer quarter
* Concentration of equity ownership and voting control
Industry
The optical system and component industry is moving from custom-built internally
developed test systems to off the shelf products. New next generation optical
components and systems have extensive test and measurement requirements. DWDM
has created additional degrees of test and measurement complexity, creating
product performance and a breadth of measurement challenges as well as new
market opportunities.
RHK estimates that the global DWDM and SONET/SDH Optical Networking market is
expected to grow from $25.6 billion in 1999 to $79.1 billion in 2003. While we
have not done a bottoms up forecast of the test and measurement market, we have
had anecdotal conversations with industry participants that suggest the market
to be in the range of 4 to 7% of total system costs. That would put the market
opportunity in the $3.2 to $5.5 billion range in 2003. KMI Corp estimates that
the Test and Measurement industry is split evenly between physical testing and
protocol testing. Some industry participants estimate the physical test portion
to weigh in at about 75% of the market. EXFO supplies physical test equipment
only. Test requirements are expected to be more demanding as DWDM channel
counts move higher and the individual channel speeds begin to press beyond
10Gbps.
Industry Issues
The carriers face pricing pressures that are forcing the deployment of new lower
cost network architectures, shorter hardware trials than have been customary
and the threat of customer defections if network capacity, reliability or price
are not at appropriate levels.
Optical system suppliers are facing an accelerating adoption rate for new system
architectures that have higher channel counts and faster data rates. In
building next generation optical network systems, the suppliers also face
challenging component performance requirements, pricing pressure from carriers
and a steady stream of new competitors touting the latest and greatest features
and functionality.
Component suppliers face hyper growth with units increasing at triple digit
rates. As components move through the production line suppliers report that as
much as 60% of manufacturing cycle time is spent in test. System suppliers are
less willing today to invest in proprietary test and production infrastructure
and prefer to buy readily available off the shelf products. Components are
subject to long qualification cycles that demand unequivocal performance and
reliability data. With the current rate of capacity expansion going on in the
industry, manufacturers need volume availability now.
Products
EXFO has two divisions including the Portable and Monitoring division that
supplies equipment to telecommunications carriers, CATV operators, public
utilities, private network operators, third-party installers and equipment
rental companies. The Scientific division supplies optical component, module
and system manufacturers.
EXFO provides solutions for carriers for applications that include DWDM
deployment, ADSL deployment, new local and long distance players, CATV broadband
rollout and monitoring quality of service (QOS). The company supplies system
manufacturers with equipment to support manufacturing and qualification of
systems to operator specifications and to maintain QOS once in operation. EXFO
supplies component and fiber manufacturers with products to ensure the quality
and reliability of components as they pass through the production process. It
is important to keep in mind that new test equipment is required for the
evolution of products needed for the move from 2.5 Gbps to 10 Gbps on up to 40
Gbps and also the qualification of new fiber and connectors for different
applications.
Products for Network Operators
* Portable power meters, light sources and back-reflection test sets
* A modular instrument architecture that offers broad measurement capabilities
* OTDRs (Optical Time Domain Reflectometers) finds breaks in cables
* Polarization mode dispersion test sets, optical spectrum analyzers and
multi-wavelength meters
* Remote fiber optic network monitoring systems
Products for Component and System Manufacturers
* Tunable lasers, power meters and light sources
* Automated test systems for EDFAs, WDM mux/demux modules and other optical
components
* Various test modules for optical fiber and fiber optic cable suppliers
Sales and Marketing
EXFO sells its products through a direct and indirect sales network. The
company has three different sales organizations each with its own focus.
* Carrier Market includes telecommunications carriers, CATV companies, public
utilities, private network operators, network installers and equipment rental
companies.
* Manufacturing/R&D Market targets optical networking product manufacturers in
various stages from research labs and start-ups to large scale manufacturing
companies.
* Private Network Market program was recently formed to focus on the enterprise
market including Gigabit Ethernet and the possibilities of fiber to the desk.
Customers
EXFO shipped products to over 500 customers in the past year. In that same
time, there were no customers that accounted for more than 6.8 % of sales. The
company's customers are about two-thirds carriers and one-third
manufacturing/R&D. That mix has begun to shift in the manufacturing direstion
in recent quarters in response to a broader product line. The growth in the
manufacturing/R&D market tends to be higher. The following is a partial list of
the company's top customers over the past year.
Alcatel Lucent
AT&T Marconi
Bell Atlantic Newcourt Technologies
British Telecom Nortel Networks
Finisar Qwest Communications
General Dynamics SBC Communications
GTE Telkom South Africa
JDS Uniphase US West Communications
Competition
EXFO faces competition from global test and measurement companies who offer a
broad range of products and from niche companies in the fiber optic test,
measurement and monitoring industry. The company's quality products and fiber
optic focus have helped it achieve the number one market share position in most
of its handheld products. The table below is a list of major competitors.
Broad Range Products Niche Fiber Optic Industry Products
Agilent Fotec
Ando ILX Lightwave
Anritsu KingFisher International
GN Nettest JDS Uniphase
Fotec Photonetics
Newport Santec
Tektronics
Valuation
The shares trade on a relative valuation basis of market capitalization to sales
at par with JDS Uniphase and at a 104% discount to the average of other high
flying optical stocks including Bookham, Avanex and Sycamore. Using an average
of the group of test and measurement stocks, the shares sell at a 28.5% premium.
While we view EXFO as a strong player in a strong industry, but believe that
is substantially reflected at the current stock price, which leads us to a buy.
Conclusion
The company has a three pronged attack on the fiber optic test and measurement
market, supplying network operators, system suppliers and component
manufacturers. EXFO is 100% focused on the end to end challenges of today's
highest growth communication infrastructure. The company has been able to
achieve consistent financial performance with industry trends that suggest an
acceleration of growth prospects in the coming years. EXFO has an experienced
management team that is investing heavily in future opportunities. We are
initiating coverage with a buy rating.
This document has been prepared by Wit SoundView Corp. Information contained
herein has been obtained from sources believed to be reliable, but the accuracy
and completeness of the information, and that of the opinions based thereon, are
not guaranteed. This report is not an offer to buy or sell or a solicitation
of an offer to buy or sell the securities mentioned or related securities. Wit
SoundView Corp. is an affiliate of Wit Capital Corp., and both companies are
registered broker-dealers and wholly owned subsidiaries of Wit SoundView Group,
Inc. Wit SoundView Corporation and entities and persons associated with it, may
have long or short positions in or effect transactions in the securities of
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Corp. may make a market in the shares of any such company and may have acted as
a lead or co-managing underwriter in one or more of such company's U.S. equity
offerings. Wit SoundView Corp. and/or Wit Capital Corp. may perform or seek to
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Do not change or reproduce this report without the express written consent of
Wit SoundView Corp. c 2000 Wit SoundView Corp.
Symbols:
GB;NWFX GB;6724300 US;EXFO
Source FC - First Call Research Notes
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