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Technology Stocks : Lightpath Technologies: LPTH New WDM player
LPTH 1.2900.0%Jul 19 12:00 AM EDT

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To: Rick Buskey who wrote (1209)3/14/2001 11:11:09 PM
From: jkc  Read Replies (1) of 1218
Hi Rick,

I'm still standing so maybe I should break out the champagne...

Infoclips from the yahoo thread just sent me this; nothing you don't already know, I'm sure, but it's always nice to hear.

The outlook for optical

[3/13/01 4:00 PM EST] The telecommunications business has been sending investors mixed messages lately. Expectations of slower capital spending are widespread. However, agreement about what levels are likely is not.
As negative earnings preannouncements flourish at an astonishing rate, some have projected growth in networking around 72% in 2001. Although this is down from 118% last year, wouldn’t this be strong growth for most sectors? Stock prices are not so ambiguous. The Amex North American Telecommunications Index has dropped 20% since January 2000, and many telecom companies are easily 50% off their 52-week highs.

Amidst all the froth and furor in the telecom sector, Ciena Corporation’s (Nasdaq: CIEN) recent prognostication that its outlook was much brighter than its older and larger brethren’s stands out. In 2001, Nortel expects revenue growth to be down to 15% from the 30% expected for the year as late as December. Debt-laden Lucent Technologies recently reported a 26% revenue drop. But at CIEN, management is estimating an extra 15% increase in revenue above already positive expectations. It attributes this enviable position to its emphasis on next-generation optical-networking equipment, which it said remains in demand even though general tech spending is well off its prior pace.

OK, who wouldn’t be a little curious? After all, if there is continued weakness, there could be quite an industry shakeout—do we have a survivor here? Maybe Hollywood writers for the reality TV hit “Survivor” should be taking notes. If telecom CEOs begin chasing wild pigs and take a sudden interest in voting, I say we get worried. But until then, how do we pick through the ruins of this beleaguered sector?

There just might be some opportunities. We’re obviously a long way from connecting the Earth’s inhabitants to speedy and efficient mass communications. As those of us who don’t stand a chance of getting DSL before it becomes obsolete will attest, the industry hasn’t even reached cruising altitude in terms of the technology to provide that service.

Backbone Strain

Our nation’s telecommunications infrastructure has its roots in voice networking that uses circuit-switched technology that provides each data stream with a dedicated channel via copper coaxial cable. It’s great for low bit-rate transmissions among fixed, symmetrical geographic locations exchanging relatively equal amounts of information. With the Internet, those dynamics have completely changed. In addition to being asymmetrical, online transmissions occur across multiple geographic locations in short, large bursts, and the increased volume is off the charts. Internet traffic is projected to increase from 350,000 tetrabytes per month at the end of 1999 to more than 15 million tetrabytes per month in 2003, according to consulting firm Ryan, Hankin & Kent—quite a leap.

Increasing the bandwidth is vital to accommodating this level of demand. Setting aside the yet-unmet technological challenge of marrying data and voice networking to acceptable standards, there’s widespread agreement that the optimal system for telecommunications would be a pure optical networking system. This technology uses light, or photons, to send data and voice traffic faster and more efficiently than the older, electronics-based technology deployed by phone. It is said to be the lowest-cost, highest-capacity format known. It uses laser-generated light to transmit sound or other data through the optical fibers in fiber-optic cables. Just as in an electronic system, sounds are translated into a digital signal, which is then coded into light. The smallest piece of information is a bit, which is communicated by the presence or absence of a pulse of light. Pulsing light carries messages on the optical fiber, which is composed of strands of glass. A single fiber strand, smaller in diameter than a human hair, can carry more than 1 million voice channels.

In addition to speed, immunity from electromagnetic interference has made fiber-optic systems the preferred solution for increasing network capacity. Fiber-optic cable has been the primary medium for long-haul telecommunications and cable television networks for the past 20 years. Undersea fiber-optic cables connect continents while terrestrial cables, or “trunk” lines, replace the traditional copper system as highways for telecom signals.

Not Quite There Yet

Unfortunately, a few obstacles stand in the way of achieving the dream of an optical network that goes everywhere.

The technology is young and still evolving. For instance, the ability to drop off and pick up transmissions optically has not yet been successfully developed. Most communications networks have to convert photons to electricity along the network, a costly and energy-consuming proposition. With the recent slowing of the capital flow to telecom companies, the technological development necessary to overcome such limitations is likely to be slowed.

Most importantly, the 49 million miles of fiber cable laid in the United States apparently aren’t enough to get the job done. The main gaps are in metropolitan areas, where the cost of laying the fiber is prohibitive. Opportunities to replace copper in the shorter-distance metropolitan markets, the lines from the “highways” to individual connections, have been limited. The cost is likely to be in the billions; after all, the first 49 million miles cost more than $71,000 per mile.

We are most likely to see fiber-cable service increases in large new housing developments, although some improvement is occurring in metropolitan access as well. In Albuquerque, for instance, robots have been sent into the sewers to install fiber to connect existing buildings.

Making the Best of It

In lieu of deploying new fiber-optic cable, telecommunications service providers have been upgrading existing systems to significantly increase the capacity of their fiber-optic networks. This is where CIEN has pinned its hopes by marketing advanced methods of transmitting multiple signals at slightly different wavelengths through a single fiber to achieve efficient use of fiber capacity.

The number of wavelengths carried over long-haul fiber has grown from about eight to over 160 separate channels. The increasing complexity of the design, experts say, has contributed to the need for additional telecom system suppliers and, consequently, is an ideal situation for outsourcing. This is where many of our small-cap players—makers of such devices as routers, amplifiers and multiplexers—come in. As this dynamic industry evolves, the most successful component makers must have the capacity to integrate their technology not only with current systems, but with the next generation as well.

While we can now appreciate the need for CIEN’s products, they are not alone in this space, competing with names such as Nortel, Alcatel and Fujitsu. CIEN’s differentiation, the company says, is in providing value-based products that allow service providers to increase the capacity of their existing systems, an important fixed-cost reducer and productivity-enhancing tool during recessionary times. Another advantage is that CIEN’s market does not include the antiquated, low-margin telephone networks.

Clearly, optical has the capacity to significantly lower provider costs. CIEN management believes that the application of its multiplexing product has led to a bandwidth price decline of up to 80% since 1995. However, the heavy debts, limited cash, overcapacity and inventory overhang that haunt this industry cannot be taken lightly. Careful stock picking in this sector is crucial. As for CIEN, regardless of the potential of its value-based counter-cyclical strategy, with a market cap over $20 billion, it’s not on our radar.

However, due to volatility in this sector, a few of the larger up-and-coming optical components manufacturers have come down enough in market cap to enter the realm of RedChip™. Avanex Corporation (Nasdaq: AVNX) makes fiber-optic-based products known as photonic processers. It’s dramatically off its 52-week high of $273.50, resting at $22.38. New Focus, Inc. (Nasdaq: NUFO) makes amplifiers. Selling at $17.94, it’s also well off its high of $163.12. Analysts appear to be pretty well split as to whether these are strong or moderate buys, with some dissenting holds.

Proponents of the pure optical solution warn that the current fiber-optic system, which is managed to optimize the existing fiber, is increasingly complex and vulnerable to breakdowns. So, as you gingerly stock-pick your way through this sector, keep your eye on the next next generation of fiber optics—all-photonic networking. Scientists at MIT are working on a system that carries information inside the laser itself. This system would be expected to increase transfer capacities to 100 Gbps (billions of bits per second) using a totally frictionless stream of pure light.

It’s a dream not likely to die soon.

Shelley G. Reed, CFA, RedChip™ contributing editor
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