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To: Bill Fischofer who wrote (11284)	5/17/2001 8:13:06 AM
From: Curtis E. Bemis	Read Replies (1) \| Respond to of 15615

The TSIX ripple effect (mostly via Alcatel)--from UBS Warburg-------------- IMPACT TO COMPONENT VENDORS OF DELAYED TRANS-PACIFIC NETWORK Summary: On 5/15/01, 360networks announced the delay of its transpacific optical network buildout. As a result, the UBS Warburg European telecom equipment team believes Alcatel (ALA-$32.31-Hold*), the optical systems vendor for this network, will see reduced submarine transport revenues. Alcatel was the best customer for many components vendors during the March quarter. However, we had already modeled significant sequential sales declines at most of the companies we cover. Given Alcatel's size and the importance it played in the March quarter, we are closely monitoring this situation and any resulting inventory growth. We note that in the March quarter, Alcatel's total inventory grew by 16% to EUR 8.6B. An analysis of optical inventories will be available in our quarterly review, scheduled for release the week of 5/21/01. Highlights: · Following the announcement from 360networks, the UBS Warburg European telecom equipment team now projects a sequential revenue decline for Alcatel's submarine transmission business of approximately 46%. Our 6% sequential growth estimate for the terrestrial transmission business remains unchanged. Alcatel was a 10% customer for many components companies during the March quarter, as detailed below in Table 1, and the largest customer for JDS Uniphase (JDSU-$21.03-Buy) - we estimate Alcatel represented close to 15% of JDS's March quarter sales. · For JDS in particular, we modeled a 20% sequential drop in sales to Alcatel during the June quarter. As a percentage of sales, the submarine market was an important part of SDL's revenues at nearly 30% of sales and historically for E-Tek at 20% of sales. In addition, Alcatel was an important customer for both of these stand-alone companies. However, we believe our June quarter estimates already account for the weakness at Alcatel, and we remain comfortable with our June revenue estimate of $690M. · As for the remaining components companies, we do not believe we need to further reduce our estimates given this news. However, we believe inventory issues related to the Alcatel submarine business should be closely monitored going forward. Specifically for OCP (OCPI-$13.75-Buy), where Alcatel was 21% of sales, we note that none of its business with Alcatel is to the submarine market. · Part of our investment thesis for the optical components group is that the companies with broad product offerings and a diversified customer base are able to weather normal fluctuations at any particular customer. Comparing component vendor sales to Alcatel in the December and March quarters (refer to Table 1 in Analysis section), it is evident that Alcatel's emergence as the industry's largest customer was a recent phenomenon. This was due in large part to the dropoff in sales to Nortel (NT-$13.89-Hold) and Lucent (LU-$9.73-Hold). While we expect a weak June quarter, longer-term we believe those components vendors with a diversified customer base should be able to shift sales to meet the demand of those systems vendors experiencing the most success in any given quarter. Analysis: Table 1: Optical Components Revenues % Alcatel % Alcatel Revenues Q/Q Sales Dec-00 Mar-01 Mar-01 Jun-01 E Agere (optical) NA(1) NA(1) $379M NA(2) Avanex <10% 15% $30M -18% Bookham <10% <10% £11M -35% Corning (photonics) NA(3) NA(2) $237M Flat/Down JDS Uniphase <10% >10% $920M -25% New Focus <10% 16% $41M -22%/-30% Oplink <10% <10% $36M -16% OCP 15% 21% $48M -24% (1) Does not report 10% customers for optoelectronics division (2) Guidance of -14%/-20% decline for total company sales (3) Does not report 10% customers for photonics division but Alcatel mentioned as significant customer on conference call Source: Company reports and UBS Warburg LLC estimates