CEO of Bookham Technology comments on expectations for reasonably rapid change in the financial profile of the company in Wall Street Transcript Inter
Friday June 28, 01:24 PM
uk.biz.yahoo.com
GIORGIO ANANIA is Chief Executive Officer and President at Bookham Technology
TWST: Can we start with an introduction to Bookham Technology (LSE: BHM.L - news) , bringing us up to date with who the company is today?
Mr. Anania: Bookham Technology is a manufacturer of optical components. Our customers are the manufacturers of optical telecommunication systems companies such as Lucent, Nortel, Fujitsu and others -- and they in turn sell to the phone operators. Now what makes Bookham different from other manufacturers of optical components is that for quite a while now we believe have held the idea that to make optical communications really explode, the cost of optical communications needs to come down dramatically and, because a large part of the cost of the systems is in the components, the components therefore need to come down in cost. The latest recession has made this absolutely clear to everyone and our method of making costs drop is by taking semiconductor technologies and applying them to optics -- and we've all seen what semiconductor technologies can do to cost structures in the IC world. If you consider what semiconductor technologies did for cost structures in the IC world, tThe same type of cost reduction is possible in telecommunications. Today, Bookham has we have 3 disruptive semiconductor technologies that address various optical components families that we can integrate together onto a single chip. In other words, we can and manufacture these products in volume with more and more functions on a chip at a lower cost. That's basically our strategy going forward. ADVERTISEMENT
TWST: Could you sketch a quick picture of the competitive landscape and some of the key characteristics?
Mr. Anania: If you look at our market, first of all our customer base -- the major systems companies building optical systems -- is quite concentrated. The top 8 companies represent 90% of the world market for optical systems. So, there's a very strong and small customer base. In our competitive space there are about 5 large optical components companies and about 5 medium-sized optical components companies, of which we are one, and then there are about a 1000 other small optical components players. Now, Bookham's view of the world is that with this concentration in the customer base, customers need suppliers who are able to supply them with a broader range of products, which are not just components, but full solutions that may involve several types of components packaged together in the module or printed together on a chip. Our view is that the smaller players will have a hard time maintaining a position with the systems vendors. They are just too small to be companies that the large systems vendors can rely on and many of the big players are stuck with technology that doesn't scale very well with volume. Fiber optic components today are essentially made manually, mostly assembled in China and low labor cost countries. Many are still using manual assembly techniques from the 1970s and 1980s. Even though they are becoming increasingly automated, it is going to take time to implement, therefore hand assembly is still required. We believe that by integrating more functions on a chip, we can drive down cost significantly. Bookham is not the only player trying to do this, but today we believe is the only player with the full range of breakthrough semiconductor technologies to provide complete solutions, from the lasers and receivers that are at the two ends of a network, to the techniques that can be used in amplifiers and nodes, and the multiplexers and demultiplexers that are in the middle of the network. So, if you look at our technologies, we have an enormous technology potential. We have a broad line of products that are emerging. The revenues are still relatively small and our challenge over the next year is to turn those design wins we already have, and the great products that are now going through qualification, into commercial volumes, whereby we change the top line and start becoming a much bigger player in this market.
TWST: Are there any specific metrics or milestones one may use to gauge your progress and judge how successful the company is?
Mr. Anania: Yes, there are three things to look for. Because of such a long lead-time, maybe a 12-18 month process, getting designed into a platform, which means you work with a customer and they accept your product, the first thing investors need to look for is some evidence of design-ins being made public. Very often our customers don't want us to talk about it. So, a lot of these are still not public. The second metric is sales growth, when things actually hit the top line. We have a fixed cost business model. Everyone knows that semiconductor fabs are fixed costs and basically whether you've got sales or not, it costs the same. It also means that your contribution for making products is actually very high. So, unlike most companies, we benefit very strongly, financially, from sales growth. We have given the market a steer that not only have we multiplied our sales this quarter by 2.7 versus the previous quarter, but we also see continuous sequential growth every quarter this year, even with zero market growth. Thirdly, to make profitability come even sooner, it is not enough purely to ramp up the sales and change the cost structure from the top line. It's also important to reduce our overhead costs through efficiencies in our manufacturing and development organizations, bringing the cost point down and making a double attempt at bringing in profitability, both from the top line and from reducing the midline. There should be evidence quarter by quarter of reduction in total company overhead costs at the same time as we are ramping up the sales. Those are the three things for people to look out for in terms of our success.
TWST: What are your thoughts on the current valuation?
Mr. Anania: Currently, the market is placing a negative value on the company of about a $100 million, negative from our cash position of about $235 million and there seems to be a uniform reason for that. Everyone sees that Bookham could be a great wild card in this optical components game because we have some very interesting breakthrough technologies. What the financial markets still needs to see are two things: One is evidence that our technologies, which appear very sexy, are indeed winning in the market place and that will translate to design wins and then sales growth. The second is that even if we were to win, our cost structures today are at very high overhead levels and the markets need to be convinced that we can reduce those levels to get to profitability. Some of the analysts on the street are saying the growth on the sales cannot be as high and the cost cutting as low as necessary to bring profitability into a reasonable time frame. <//b>We would dispute that and I think that is what's holding back the stock. When the financial markets start understanding that we are indeed going to be seeing quarter on quarter improvement in the top line and that we are going to be seeing quarter on quarter reduction in the overhead costs, most likely steeper than what is expected, then the street will start understanding that the profitability will be sooner than their expectations.
TWST: Summing much of this all up, where would you expect to see the company three years down the road?
Mr. Anania: There will only be 5 or 6 optical components companies who are going to be broad based players and relevant winners. Bookham is clearly aiming to be one of these 5 or 6 survivors. In fact, we are aiming to be a top 3 company on the basis of our disruptive technologies. For a company with relatively a low sales level that may sound arrogant, but that is what we are setting out to do and as I mentioned before we think we have the technology, the people and the money.
TWST: When you have a chance to talk to potential long- term investors, what are the three or four main reasons you give for them to take a closer look at your stock?
Mr. Anania: The industry has seen a contraction over the last year and it's been very difficult to give visibility to investors on what was going to happen in the next quarter. I think we are pulling away from that phase. Investors need to start seeing that we have been accurately hitting our expectations every quarter and that those expectations are set for a reasonably rapid change in the financial profile of the company. What I would like to ask investors to do is watch what we are doing, check that the early indictors we have given you are in fact happening. We are going out, speaking with investors, and telling them what to watch for. We are coming back 3 months later and saying, you've seen some of the things we gave you 3 months ago. Here are the things to watch out for over the next 6 or 9 months. If that happens, you will know that we are moving along that task. If we are not significantly more advanced in one year, then you will know we have lost, but there are a number of things you can look at during the next 12 months that will tell you whether we are hitting our targets.But in summary, why take a look at our stock? Bookham has transitioned over the past two years. Our breadth of product is now far more commercial, our management has the know-how to convert these technologies in the market place. We have over $235m of cash and our costs are under control. Significant upside for a company currently trading at less than half its current cash position, with clear strengths seems obvious to me.
This special Communications Equipment Issue includes:
1) Special Focus - Communications Equipment - In an in-depth (9,300 words) Analyst Roundtable, Samuel Wilson Analyst for Merrill Lynch (NYSE: MER - news) & Co, Todd K. Koffman, Managing Director at Raymond James & Associates, David H. Toung, Vice President of McDonald Investments, Inc., examine the outlook for the sector and share specific stock recommendations.
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