Dow Jones Newswires
Despite Spending Concerns, Fiber Optic Cos See Strong
3Q
By JOHNATHAN BURNS
Of DOW JONES NEWSWIRES
NEW YORK -- As demand for high-speed, always-on Internet access services proceeds
unabated, fiber optic gear-makers continue to stuff their pockets with cash on the way to producing
strong results in the third quarter.
Despite the repeated bumbling and stumbling of Lucent Technologies Inc. (LU), fiber optics
systems makers Ciena Corp. (CIEN) and Tellabs Inc. (TLAB) are expected to show substantial
gains in revenue.
Component suppliers like JDS Uniphase Corp. (JDSU), SDL Inc. (SDLI), ADC
Telecommunications Inc. (ADCT) and Corning Inc. (GLW) are also expected to report solid
results, even as the companies spend money on acquisitions and expanding capacity.
Somewhat insulated from the sell-off of telecommunications stocks in general, the main players in
fiber optics are benefiting from a quick shift to broadband-centric networks by the world's largest
carriers.
Fiber optics, which transfer information down glass fibers at the speed of light, are now the most
efficient way to move large volumes of communications traffic.
And spending for the new systems seems unavoidable.
As a result, highflier Ciena Corp. (CIEN) is expected to earn 12 cents a share on revenue of about
$280 million, according to a First Call survey of analysts, compared with 2 cents on $141.4 million
a year ago. The Baltimore-based concern has been the biggest beneficiary on Wall Street this year
among big-cap makers of fiber optic equipment, with a stock that's up more than 800% from its
52-week low. It trails only Nortel Networks Corp. (NT) in sales of fiber optic systems.
"The demand for optical networking equipment is still unprecedented," said Jim Jungjohann,
telecommunications equipment analyst with CIBC World Markets.
Tellabs, the first major name in the sector to report results, is expected to post earnings of 45 cents
a share, according to First Call, on revenue of about $860 million. A year ago, the company earned
34 cents a share on revenue of $595 million.
Lucent continues to lag market leaders Nortel and Ciena in sales of fiber optic systems. Last week,
Lucent said it would post earnings per share of between 17 cents and 18 cents on revenue of $9.3
billion to $9.4 billion, compared with 25 cents on revenue of $8.1 billion, restated to exclude units
the company spun off.
Lucent had already lowered earnings expectations, which were originally at 32 cents a share for the
quarter. Lucent blamed a higher cash reserve for bad debt, lower margins and sales in optical
systems due to a longer-than-expected certification process and a greater-than-expected decline in
sales for circuit-switching products.
Two messages affecting the larger fiber optics market can be gathered from Lucent's warning, said
Jungjohann.
The first - that Lucent's circuit switching sales dropped faster than anticipated - signals a quicker
move into fiber optics.
"It shows a more expeditious migration to next-generation networking equipment," he said.
But the other message is that JDS Uniphase and SDL, which have agreed to a merger, may both
see some softness in sales. Both companies sell components to Lucent.
"Expect modest upside from JDSU," Jungjohann said. "It'll probably be held back because of
Lucent."
JDS Uniphase is expected to earn 16 cents a share during the company's fiscal first quarter on
revenue of about $755 million, according to First Call, compared to 8 cents on about $290 million
in the year-ago period, adjusted for acquisitions.
George Hunt, telecommunications equipment analyst at Wachovia Securities, said he expects some
upside on revenues.
"We think they'll beat the consensus numbers and revenue may be as high as $780 million to $790
million," he said. "They have all the demand they can stand."
Meanwhile, JDS Uniphase's merger partner SDL is expected to earn 38 cents a share in the third
quarter versus 10 cents a year ago, according to First Call. Revenue is expected to come in at
$140 million.
Jungjohann said the company is seeing unprecedented demand for pump lasers and is sold out
through the first quarter of next year.
ADC Telecommunications, with a strong portfolio of fiber optics and broadband connectivity
products, is expected to earn 17 cents a share in the company's fiscal fourth quarter compared with
12 cents a year ago, according to First Call. Revenue is expected to approach $998 million versus
about $634 million a year ago.
Corning Inc., the world's leading producer of optical fiber, is expected to post third-quarter
earnings per share of 35 cents on revenue of about $1.95 billion, compared with 19 cents a share
on $1.25 billion a year ago.
Last week, Corning raised its estimates for the quarter, with optical fiber sales being one of the
biggest contributors.
"This company is currently capacity-constrained in most of its communications and display
segments and is in the process of aggressively ramping capacity," Max Schuetz, analyst with
Thomas Weisel Partners, wrote in a recent note.
That will likely be a continuing trend for fiber optic equipment makers, most of which have already
announced ambitious plans to expand capacity to meet the hunger for fiber.
-By Johnathan Burns, Dow Jones Newswires, 201-938-2020;
/////////// johnathan.burns@dowjones.com
/////////////also/////////////////
The Wall Street Journal Interactive Edition -- October 17, 2000
Breaking Views
Optronics Shares Keep Rising
As Tech Stocks Keep Tumbling
Edited by Hugo Dixon
What's the difference between the optronics bubble and the mobile bubble? The former hasn't burst
-- yet.
While tech stocks all around have been crashing, optical components remain on incredible
multiples. True, shares like JDS Uniphase of the U.S. -- the industry's gorilla -- are well down from
their highs. But it still trades on around 50 times sales. And the United Kingdom's Bookham
Technologies enjoys a rating of over 100 times sales. This is one of the few areas of the market
where investors seem willing to suspend disbelief and invest all their hope in the future.
There are, of course, reasons why optronics -- gadgetry that
allows data to travel at the speed of light -- are such a stock
market darling. The market for broadband data communications is
booming. Traffic seems to be doubling every few months. Hence,
the demand too for a clever kit that allows fiber to carry more
data. Moreover, there aren't that many manufacturers with the
ability to supply all this fancy equipment.
However, this imbalance between demand and supply is unlikely to last forever. The demand for
high-speed data won't keep outstripping the capacity to carry it -- not least because some optronic
components can increase a hundredfold the capacity of a single optical fiber.
Optical components are experiencing a classic bottleneck phase -- which will be exposed when
more supply enters the market. Competition is just around the corner, not just to produce lasers,
switches and the like, but also for investors' attention. One of the reasons share valuations have
gotten so high is because there haven't been many stocks to choose from. But, in the past couple of
months, optical companies have been jumping on the stock-market bandwagon. And at least six
are slated to float in the U.S. in the next few weeks.
What, then, about the counter-argument that optronics are different from mobile communications
because they haven't been hit by huge license fees? Well, yes. But only up to a point. In both cases,
the main customers are the telecommunications operators. And the telecom operators are growing
financially stretched. In Europe, the need to pay for third-generation licenses is causing the trouble.
Meanwhile, in the U.S., carriers are spending about 30% of revenue on equipment -- or twice the
long-run average.
If this massive expenditure was going to produce quick returns, it might be sustainable. But it won't.
And the message of the past few months is that financial markets are unwilling to keep writing blank
checks to the operators. When they start cutting their spending, the optronics bubble will burst. |
