numinary

Outsourced Manufacturing Will Have Little Impact on Optical Suppliers' Operating Margins

I understand that investors cannot appreciate the difficulty of manufacturing fiber optics, but I still struggle not to sigh when I read comparisons to the IC industry. This is similar to comparing a NYC hedge fund to a local community bank -- scale is different, customers are different, regulations/standards are different -- but they both deal with money...

Some of this is inherent in the physics of the devices, some of it is inherent in the different market sizes -- 2 orders of magnitude is a big deal...

Vertical integration for optics suppliers can be a key differentiation. It is important for the optics suppliers to understand what technologies matter most to keep in-house. For example, perhaps Finisar feels that their differentiation is at the transceiver manufacturing level so they don't want to let that "know-how" out to competitors thru outsourcing of manufacturing. JDSU might feel that their differentiation is in the fabrication of optical devices and the manufacturing at the transceiver/sub-system level is not unique.

The author seems to lump all of the manufacturing together in one clump and not appreciate that different manufacturing steps have different technological requirements. The manufacturing that is going on at Fabrinet for JDSU does not involve the chip (iii-v semiconductor such as InP) fabrication, but rather PCB manufacturing, and some chip packaging. Finisar keeps it all in-house because they have more high volume products with which to ride out waves in the industry whereas JDSU is more of a telecom play and tends to have more peaks & valleys which correspond to network build-outs.

Please do a little more homework on the industry before posting next time. All the same, I take your comments about the science fair culture to heart and do not deny that some of that is present...

CIENA and Bookham: A Good Match?

reasons to be cautious on BKHM:
-13.7% operating margin (ttm)
only 50mm in cash with -39mm levered free cash flow (ttm)
major >10% customer is Nortel who is selling off their optical business
major customer is Ciena who pre-announced weak sales

reasons to be bullish on BKHM:
amount of money lost each quarter getting smaller
some interesting product announcements

reasons why a systems company is unlikely to buy an optical company
a) systems companies all spun out their optical subsidiaries pre-bubble or during the telecom bubble
b) premise is to "realize public value" of these businesses
c) additional premise is to allow optical companies to sell to many different system vendors & carriers and therefore address a larger market. if the optical company is in-house then they can typically only sell to the in-house customer and not external
d) Ciena would rather buy from many suppliers than support the R&D for an in-house optics team