Whiff of consolidation surrounds chip makers in rocky fiber market
At the beginning of this year, there was a swell of cautious optimism in the fiber-optic telecom community. Off the back of this, some of the III-V chipmakers serving the industry enjoyed something of a surge in their stock prices. JDS Uniphase, Bookham Technology and Avanex all saw 50% added to their stock value in late January (see graph).
But after that initial peak, it was all downhill in 2004, with Bookham s stock faring the worst. By mid-November, the company, which recently switched corporate domicile from the UK to the US, had lost 75% of its stock value in one year. Finisar, which is in the process of acquiring Infineon s fiber-optic division, has seen a similar tumble in its value.
One of the sector s better-performing stocks since the February peak is that of JDSU, but even the market leader has seen its value halve since then, and the company was trading at around 10% below its November 2003 price as Compound Semiconductor went to press.
Those falls in share price came as all the companies in the sector reported strong increases in revenue, but remained some way from profitability.
For the three months ending September 30, JDSU, which controls an estimated 20% market share according to a recent report (see Compound Semiconductor July p15), saw its revenue from communications-based products rise 24% sequentially to $106.1 million, representing 55% of the company s total sales. However, this rapid upturn was described as anomalous by the company as it projected a downturn in overall revenue in the forthcoming quarter thanks to ongoing market uncertainty.
Despite that strong upturn, the San Jose-based company still reported an overall net loss of $36 million, with the communications product group posting an operating loss of $10.3 million. The upshot is that JDSU has consolidated three communications product groups into two, while also rationalizing its manufacturing operation. Michael Ricci takes over as senior vice-president of JDSU s new components and modules product group. That division was created through the merger of the former components and transmission product groups. With 200 product lines, Ricci s new group has the broadest portfolio of components and modules in the industry.
One casualty of the restructuring is the firm s fab in Eindhoven, the Netherlands, which JDSU acquired from Philips semiconductor laser business in April 1998. "We have identified two possible manufacturing partners," said CEO Kevin Kennedy, describing how JDSU plans to reduce its "manufacturing footprint".
These measures, which will include a reduction in headcount at the company s North American manufacturing operations, will save JDSU "tens of millions of dollars" per year, Kennedy said. Inventory reduction and restructuring is expected to take one year.
JDSU has also streamlined its transceiver manufacturing operation by way of a contract manufacturing deal with Fabrinet. The agreement - for an undisclosed sum - will see JDSU sell its Singapore and Bintan, Indonesia, facilities to Fabrinet while providing a long-term source guarantee between the two companies. About 450 employees will transfer to Fabrinet as a result, although JDSU will retain its design and development team in Singapore.
A similar set-up is continuing at Bookham, which is increasingly resembling JDSU with its San Jose base and Shenzhen facility, as well as at Avanex in nearby Fremont. On revenue up 12% sequentially at $43.6 million, Bookham made a $38.3 million net loss (the company revised this figure after discovering an accounting error in its initial report of a $37.1 million loss) in its first quarter, which ended October 2. Although aiming to break even at the gross margin level in the next quarter, Bookham still expects to burn through up to $22 million in cash over the next three months. The company reported that it now has $79 million in cash and short-term investments on its balance sheet, down almost $38 million from the prior quarter s figure.
Bookham CEO Giorgio Anania pointed to some positive signs, however. In the company s first-quarter conference call he said that the first $1.6 million worth of products had shipped from Bookham s Shenzhen facility during the quarter. And if sales from the JCA Technology business (which was sold to RF subsystem maker Endwave in July) are ignored, Bookham s sales showed a 17% sequential increase.
Meanwhile, orders from Canada-based Nortel Networks, Bookham s number-one customer and the previous owner of its state-of-the-art 3 inch InP wafer-fabrication facility, are said to be ramping up after rising $3 million sequentially. Revenue from sales to Huawei Technology, the Chinese telecom equipment maker that is also based near Shenzhen, hit $4.6 million as Bookham s decision to ship from its Chinese packaging facility began to bear some fruit. Anania sounded particularly upbeat about Bookham s impending penetration of customers outside its traditional client base of Nortel and Marconi (the companies accounted for 46% and 9% of sales respectively in the quarter). Revenue from those other customers was up 19% in the first quarter, he said, with the figure set to increase. Deals with many of the top 10 system builders are said to be in the pipeline.
But with cash still burning away rapidly, Anania must also address costs. Among the measures being taken is a "simplification" of the company s product platform. "We will remove a whole layer of overheads," said the CEO, while adding that Bookham would be using more Asia-based suppliers in the future.
He is also minimizing the company s locations, specifically closing the Milton Park, UK, facility where Bookham first originated. The closure of the GaAs fabrication facility in Caswell, UK (announced earlier this year), will save $2 million per quarter, while after an injection of $4.2 million, the Shenzhen facility should enable further quarterly savings amounting to $7 million. All this reorganization should be complete by mid- to late 2005. Coupled with a reduction in R&D spending, those savings are expected to bring the company close to break-even at the gross margin level.
In his outlook, Anania said he expected a sluggish increase of around 4% in revenue in the second quarter, citing "lumpiness" in the market. "The light at the end of the tunnel appears to be coming closer," he remarked. Although a 4% increase would bring the top-line figure to around $45.5 million, it would still be a long way short of Bookham s net break-even revenue target of $60 million.
Despite the slowly improving situation, particularly in the metro network sector, Anania expects yet further consolidation in the industry. "[Among component suppliers] there is a massive fixed cost and, frankly, duplication," he said, telling investors that they should expect more consolidation among players large and small. New sheriff in town Results at Avanex mirrored those of its rivals, as the company recorded a net loss of $22.3 million on sales of $35.8 million. With new CEO Jo Major, formerly at JDSU, announcing himself as the new "sheriff" in charge of restructuring, Avanex is also set to undergo organizational changes as it moves to a "dramatically different cost structure". Having already outsourced some manufacturing operations, more of the same is set to follow in the form of contract manufacturing, as Avanex seeks to move up the value chain during what Major described as the industry s "rocky" recovery.
Despite limited visibility, both Major and Anania pointed to increased spending by carriers to upgrade core networks as a sign of better things to come. The bigger picture does seem to be improving, and recent announcements from some of the industry s biggest players have set that upbeat tone. NTT, for example, is to spend ?5 trillion ($47 billion) between now and 2010 on communications infrastructure build-out that will include a massive fiber-optic deployment, while the US carrier SBC Communications and Alcatel have agreed a fiber-to-the-premises deal worth $1.7 billion.
Under the agreement, Alcatel will be SBC s primary supplier of network infrastructure as SBC targets the deployment of fiber links to some 18 million households by the end of 2007. Alcatel is a key customer for Avanex, which acquired the French company s optical components business in May 2003. When exactly these big spending plans will trickle down to the coffers of the companies supplying individual components and sub-systems is anybody s guess, but Anania hopes to see more in the way of dollars, as opposed to announcements, in the first half of 2005.
