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Calix: Long-Term Optical Powerhouse

March, 2018

During the first Market Watch panel at OFC 2018, MKM Partners’ Mike Genovese, one of a relatively few prominent investment analysts, who has real intimacy with the optical space, said that “he believes that companies, which will play instrumental roles in 5G backhaul and fronthaul, are under-appreciated.” In the past, we have expressed our view that Calix will be a large beneficiary because it was all-in on NG-PON2 from the beginning, and that the financial rewards will occur mainly after Verizon Wireless starts building its 5G fixed wireless network in a big way. The supplier will have sufficient scale to go after many large accounts (without needing to go through Ericsson) because we believe that next-generation solution will likely become the de facto standard for much of the world. (Still, it should be noted that Calix will support an XGS-PON optic on the same system.) We fully antic ...

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Finisar: Recourse in Hyperscale Space

March, 2018

During the Q&A session at the OIDA Executive Forum two years ago, this writer asked a Microsoft executive whether his company, was being too clever by half in making demands, such as open line systems, which could help lead to the destruction of the optical ecosystem in 10 years. As it turns out, our projection for such a calamity was way too optimistic, as there have been numerous, unprecedented efforts by these hyperscale data center operators to drive pricing down on a growing number of devices to unprofitable levels. Now they will be forced to fund more of the technological developments for their networks themselves, as there will be scant capital available, especially for as long as a couple of years at the largest optical component vendors. These operators will probably need to pay a high premium for the latest piece-parts for an indefinite amount of time because there will be enou ...

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Ciena Can Get Away With 400G Puffery

March, 2018

Ingrained in the “Nortel” legacy in high-end optics at Ciena is the obsession to jump to the next bit rate as soon as possible, at a minimum from a marketing perspective. In the distant past, the Canadian company leapfrogged to OC-48/STM-16, which led to an unusually short life in the overall marketplace for OC-12/STM-4. Later at least partially spurred on by MCI, which made the mistake of jumping to bleeding-edge technology too soon in deploying dispersion-shifted fiber, which favored TDM over DWDM solutions, Nortel became the dominant player in OC-192/ STM-64. Of course, when it came to higher rates, Nortel was the first to market with coherent 100G, and had a big lead technologically early in the game. However, even after it became part of Ciena, there was a reluctance to talk about the huge number of lower rate, 40G ports being shipped on the 6500. So, it is no surprise that Ciena is ...

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Lumentum + Oclaro: Ecosystem/Profit Bust

March, 2018

For a while (we mentioned a cloud bubble for components in April, 2015), fibeReality has been discussing the idea of a collapsing optical ecosystem principally as a result of the efforts of the hyperscale data center operators to increasingly push componentry down to unprofitable levels. We currently project that the really positive impact of optics supporting 5G wireless (despite the very aggressive agenda of Verizon Wireless on infrastructure including metal poles, antennas, hardened cabinets, fiber, etc.) as well as the ramp-up of 400G capacity (in spite of the widespread hype of that data rate at OFC 2018) may not occur at least until 2020. So, regardless of the rationale provided by Lumentum’s President and CEO, Alan Lowe, the timing of the vendor’s acquisition of Oclaro this month was not an accident (especially with the industry waiting so long for substantial consolidation). It i ...

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Finisar: An Attack Plan vs Broadcom

February, 2018

Will Finisar engage in all of this development work on VCSEL bare die in its new fab in Texas just to take advantage of it for 3D-sensors applications? Why should not the vendor strive harder and take on Broadcom directly with possibly higher quality (and perhaps even functionally-differentiated, especially as this equipment continues to evolve) VCSEL ICs aimed at the traditional transceiver/active optical cable space, while offered at a reasonable price? Our belief is that Broadcom commands an extremely high premium for these devices and that there was no interest by the company in going after the apparently less impressive margins expected to be generated in the smartphone sector. At a bare minimum, Finisar will be able to potentially lower the internal costs of its own VCSEL modules being delivered to data centers, as a result of higher chip volumes for apps across the board. Our sugg ...

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Oclaro: No Longer Counting on Buyout

February, 2018

Evidently, Oclaro is starting to think outside the box in selecting Walter Jankovic as its new President, Optical Connectivity, as he was formerly with Contract Manufacturer (CM), Celestica. It seems to indicate that Oclaro’s confidence level in getting acquired has gone down substantially, as it will need to look for diversification opportunities, if it remains an independent entity. The move appears somewhat similar to Fabrinet, another CM, which was already in the process of aggressively getting into new businesses, when it chose its new CEO from Sanmina. Even before it became really clear that there would be local Chinese production of new types of optical components, fibeReality started about eight months ago to discuss that without a buyout, [Oclaro] was stuck with a story line based on its “self-perpetuating optical cycle" rhetoric, including a heavy emphasis on supporting 5G wir ...

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Infinera: Doubling Down on Lost Cause

February, 2018

After bringing in an executive, who promotes to companies he will “lead a transformational charge to growth, profitability and long-term value,” in our opinion, the last earnings call at Infinera was in general just more of the same strategy, only the messaging was more convoluted than ever. While it would be very difficult at this point to figure out a way to put the vendor on a healthier path, just being confined to the literal, cosmetic, and superficial goal of “enhancing internal alignment between our engineering, product management, and marketing teams, and ensuring efficiency in our overall development process” is barely sufficient. If Infinera has any chance for survival, it needs to drastically cut back to a minimum number of products, which have the best chance for success, and give up considerably on its planned aggressive R&D expenditures. Last November, it is quite probable t ...

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Lumentum: Benefit of the Doubt

February, 2018

During the summer of 2017, to the best of our knowledge, there were major technical problems at Apple with Lumentum’s six-inch VCSEL wafers (including with the epis supplied to the component vendor). Startlingly, after a short period of time, Lumentum Holdings apparently produced them in high volume with good yields. Despite the firm’s remarks to the contrary, pulling off this extraordinary feat without full control of the development/manufacturing process within the company itself made it that much greater an achievement. Even more astounding, the vendor did not milk this monumental accomplishment for all it was worth on its last quarterly earnings call, especially after Finisar made it clear that it was pretty much a novice in addressing the challenge beyond four-inch VCSEL wafers. Actually, the size of these devices was not brought up during that conference call at Lumentum, and there ...

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Finisar: New Chip-Centric Frame of Mind

January, 2018

While Finisar’s selection of its new CEO, Michael Hurlston, pretty much an outsider from the optical realm (the only exception may be an executive position with Exar much earlier in his career) is not without some risk, fibeReality believes it was a shrewd and audacious choice. While focused on the wireless communications side of the business, he gained a tremendous amount of experience in the same spaces served by optics, including being intimately involved with data centers, service providers, and enterprises – not to mention familiarity with China. Hurlston is also well-known in the investment community. He is in a position to evaluate Finisar’s position in a fresh and objective way, and can potentially find new paths to higher margins, with even possibly the company getting acquired down the road, by demonstrating it does not have to rely solely on those few-and-far-between market ab ...

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Mellanox: Dreadful Timing on “SiPh” Halt

January, 2018

The day after it became public that Mellanox Technologies’ biggest shareholder, Starboard Value, sent a letter along with slides to the CEO and the Board of Directors, critical of the vendor’s performance, a press release was issued stating that it is ceasing “its 1550nm silicon photonics development activities.” In our opinion, Mellanox’s move was a tone-deaf reaction as it further substantiated Starboard’s claim of “excessive spending” and its apprehension about “commitments [being] merely reactionary and… not com[ing] close to addressing the magnitude of the problem.” Even worse for Mellanox, although there is in effect universal agreement that the supplier is a technologically strong company, including by Starboard, its announcement highlights a technical weakness that it has been grappling with for quite a while. Most importantly, despite its dominant position in the high-performanc ...

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Ciena: The Street Taking a Fresh Look?

January, 2018

In addition to 1) the ex-Nortel crowd desiring to remain firmly ensconced in its controlling role over Ciena’s future, to 2) what we perceived as a previously unusual amount of internal pressure to get the numbers up before reporting every three months, and to 3) buying time as well as keeping expectations in perspective before the anticipated boom in supporting Verizon’s 5G network, the rather atypical approach of developing a multi-year, financial plan appears to be attracting some renewed interest by investors (although not generally a bullish one right now). It is probably perceived as a fairly bold move when specific guidance in the optical space quite understandably never goes beyond the following quarter. At the same time, the “Nortelization” effect has resulted in the same kind of mistake at Infinera with Transmode, with Ciena not taking sufficient advantage of Cyan’s transport p ...

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Fabrinet’s Mad Rush to Product Diversity

January, 2018

fibeReality predicted a year ago that Huawei Technologies would start producing new types of optical components in-house, which evidently was substantiated in a news report in December. In between that time, there had been feedback from NeoPhotonics to us in September as well as from vendor discussions with the investment community that pointed to Chinese vendors in general moving more towards becoming direct competitors, including Oclaro mentioning in November, DCO module production happening in China, as well as Finisar not “com[ing] away with a warm and fuzzy feeling about 2018 from China demand.” For Fabrinet, the leading Contract Manufacturer (CM) of optical equipment in the world, the loss of a substantial amount of business in China by some of its large customers, including Lumentum Holdings and Acacia Communications, is just one more factor to race ahead as quickly as possible in ...

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Finisar Versus Elitists

December, 2017

While Finisar is similar to other optical vendors in spinning market research analysts (who then tend to dutifully spew up the exact propaganda) and with executives occasionally talking out of both sides of their mouths publicly, such as when it comes to the future of higher data rates, the firm is still in a league by itself for overall integrity, a characteristic which starts with the CEO, Jerry Rawls. Honest assessments of market conditions and technological advancements are often in conflict with the storylines of prominent, sometimes condescending investment analysts, and a price can be paid, such as with disproportionately lower valuations. (Finisar’s depiction of silicon photonics several years ago was a prime example.) Unfortunately, such an ethical leader, who will stick to the truth, will, in our opinion, also open himself up to being taken advantage of by large customers, such ...

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Ciena Finally Reconciled with Its Future?

December, 2017

During the summer of 2015, fibeReality published the following article: “Ciena’s Last Chance to Fulfill its Destiny” in which we asserted: “…Ciena can either finally resolve to fully execute as an optics player to ensure its survivability – or it can continue to go down a path of not fully embracing its legacy by looking to get into other markets outside of its core competency….” At its last quarterly earnings conference, we believe the President and CEO, Gary Smith, came as close as he would allow himself, to make it clear that the firm intends to remain an optical company moving forward. In our opinion, it may have even been a demonstration of not just the vendor’s growth becoming “mature.” We suspect that the “Nortelization” of Ciena, at least in this situation, played a positive role. The Canada-based contingent, which has the most influence over the company’s direction, wants to ens ...

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Oclaro Showcasing Itself for M&A

December, 2017

  While it is quite possible that there have been recent discussions between Finisar and Oclaro about a merger, Greg Dougherty seems to be taking the opportunity at investment conferences to have kind of virtual mini-interviews with Finisar for the top-level position. If nothing else, Dougherty is making an effort to anticipate and alleviate any concerns by Jerry Rawls, while reinforcing the advantages of a marriage between the two corporations. Given that we advocated that Finisar look to exit during the aberration of the China boom, as it might never have a better opportunity again, now we believe that it could be risky to its competitive position to potentially allow Lumentum to purchase Oclaro. Conversely, Rawls may be betting that the latter would only hook up with the former as a last resort because Doughtery would likely not become the CEO of that new entity, and that Finisar’s pl ...

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Infinera: Actions Speak Louder Than Words

November, 2017

As Infinera continues the messaging of ambitious product development plans, its comparatively quiet, top-level management changes indicate a supplier that is in a state of crisis, and that it will now be open to radical changes in an attempt to survive in the marketplace. While at the last quarterly earnings conference this month, it was announced that the company had taken on a new Senior VP and GM of Product and Solutions, it was evidently decided to minimize the impact of the move initially by not putting out a press release of him coming aboard this past June. In the meantime, the President of the company (also a co-founder), who was most identified with PICs remaining the domineering course forward, had his title changed to Chief Technology and Strategy Officer, which appears to be a demotion. In our opinion, it also seems that he has been expelled from day-to-day corporate decisio ...

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Lumentum: The Street’s Latest Sacred Cow

November, 2017

There was Infinera with the unflinching belief of the cost benefits of PICs (which in our opinion, was never proven), and being oblivious to a traditional long-haul player forcing Transmode to take a backseat in its metro program. Then there was Acacia Communications, although a highly proficient technology company, and the beneficiary of the positioning of its IPO during a perfect storm, the valuation for just a DSP player became absurd. Later it was Applied Optoelectronics, which pretty much had the 40G market to itself for intra-data centers transceivers along with a very low-cost operation, while there was inadequate appreciation for both the low-entry barriers at 100G as well as the other drawbacks of being in the hyperscale space. Now Lumentum Holdings remains the latest darling on the Street based solely on apparently being the market leader in 3D-sensing, while not questioning th ...

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AOI: Lesson of Hyperscale Operators Trap

November, 2017

Although Applied Optoelectronics’ inevitable fall from grace was at least partially self-inflicted, the actual moral of the story has to do with the potential hazards of getting too far ensconced in the hyperscale data center space. The opportunity in general has produced a great deal of fascination for high-level executives at both optical component and system vendors, and they could not resist penetrating the market with the hope of a rewarding return on their investments. They wanted to show off that their companies associated with customers, which have been among the biggest movers and shakers in the US economy. Even in ADVA Optical Networking’s situation, in which the leadership was apparently hesitant to go too deep into the abyss, the enticement was too great to overcome. The other side of the coin has tended to be ignored, which are irregularities in order rates mainly because of ...

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Finisar/Oclaro: Nearsighted Beyond 4x50G

November, 2017

As with fibeReality, both Finisar and Oclaro have problems foreseeing 400GbE in any meaningful way in the anticipatable time ahead. While each is more than glad to mention development efforts in this direction, their powerful statements included in a couple of recent articles on Gazettabyte cannot be dismissed. An executive from Finisar said, “There is probably more technical risk in 400 gigabits than any of the historical data-rate jumps we have seen.” The Chief Commercial Officer from Oclaro said, “The industry really wants four channels. When you use more lasers, you are adding more cost." In addition, with the expectation of NG-PON2 becoming the de facto standard for at least many large portions of the globe, 25G will even have longer legs. Any vendor that can produce a low-cost 25G laser will be a big winner in the future optical access space. All in all, it is not even that easy to ...

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Ericsson/Calix: De Facto NG-PON2 Model

October, 2017

fibeReality fully expects Ericsson/Calix to be the primary beneficiary of NG-PON2 becoming the de facto standard for much of the world. We anticipate that the vendor combo will take the lead on both 5G wireless and supporting optical backhaul/fronthaul equipment for Verizon, which is in the process of quietly setting up next-gen infrastructure well beyond its publicized trials. The service provider is fully committed to the realization of NG-PON2, which would represent the first time in the history of optical communications that such a large disparity at the outset in first cost would not be a prohibitive factor in moving forward on a solution. Despite any rhetoric to the contrary, Verizon has its whole future riding on the success of 5G, and other access alternatives are simply inadequate to completely provide all of the desired functionality.  While overcoming the high cost of NG-PON2 ...

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Inphi’s 100G DSP: Another Blow to Acacia

September, 2017

As usual, when a vendor, such as Inphi, makes a series of announcements on products or on R&D direction, the bulk of the attention is always on the most cutting-edge feature or solution, not necessarily the most practical, which would frequently be more inclined to ultimately make the most money for the company, especially over the very long term.  Its new COLORZ-Lite is really just an extension of a niche product. There is a lot of emphasis on Inphi’s development of 50-gig and 100-gig IOs, not taking into account how much further 25G should remain competitive, including our expectation that NG-PON2 will likely become the de facto access standard for most of the world (which we addressed in real time during a 5G workshop at ECOC 2017), not to mention the technical challenges in moving to these higher serial rates. Naturally, even with the LightSpeed-III M200, the focus on the name is on ...

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3D-Sensing: Broadcom & Philips Sleepers?

September, 2017

The quietest potential vendors of VCSEL dies for next-generation smartphones and other consumer-related solutions, Broadcom and Philips Photonics, should not only be ruled out, but ought to be strongly considered given their learning curve with such devices, and their greater amount of experience to scaling up to the tremendously higher quantities compared with the three perceived leaders, Lumentum Holdings, Finisar, and II-VI. The assumption in the market that has been made is that Broadcom cannot reach the margins levels it would desire at this point in time, but that could all change if Lumentum does not remain a viable long-term player (and actually there is some other analysis, which points to this possibility), the probably safe betting that II-VI never makes this space a primary concern, and if Finisar at the end of the day, decides to stick to its traditional knitting. Like Finis ...

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AOI Cheerleaders Few and Far Between

September, 2017

The brief China boom in optics attracted a lot of fascination from members of the financial community, many of whom had no appreciation of the historic nature of the industry. Before this period, investors were not even close to being as interested with such suppliers, and would kind of stay away from stocks (as always, fibeReality does not recommend any kind of security).  For example, we have pointed out before that there was very little venture capital money spent on 100G. So, more recently, our firm would consult to investment bankers, VC firms, etc., who were legitimately doing due diligence, as they would point out how remarkably well these optical component firms were performing, and they were enthusiastic about using their capital in this space, or even considering taking a particular vendor public. In addition to a specific evaluation by us of a manufacturer, our response would ...

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Finisar-Oclaro Merger Very Plausible Now

September, 2017

In the past, we would have thought at least twice about Finisar buying Oclaro, given the less than stellar experience the former had earlier in acquiring more of a telecom-centric entity. Of course, Jerry Rawls was still in effect running the firm as Chairman of the Board. The dynamics have changed dramatically now with Rawls’ retirement announcement. After putting his heart and soul into the company, he will want to leave it in good hands. The most important advantage in a potential merger with Oclaro is that Finisar would automatically get a top-notch CEO, Greg Dougherty, who has been battle-tested to say the least, and shares some of the same characteristics as Rawls, a low-key, practical leader. There would be other benefits as well, including Finisar saving face, if it were to choose to pull back from the consumer-centric, 3D-sensing market. Given the unique and stringent challenges ...

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MACOM and Fabrinet: Sound of Silence

August, 2017

On our daily market perspectives page, we have been discussing the mystery surrounding the lack of discussion on Amazon at public events involving MACOM Technology Solutions and Fabrinet. While there is not access to what was totally addressed at these conferences, as we go to publication of this article, it appears that both of the companies are ignoring the opportunity, and for whatever reason, the financial analysts at these meetings are not asking any questions on the matter. As a result, there remains only the notes of one investment firm, which was likely selected for being the most bullish on the optical space recently, as the only obvious source of the apparent agreement between the three companies. However, as we pointed out on our last blog post, even if Amazon were to change its mind in building its own 100G CWDM4 devices, the jolt of the possibility has already affected vendo ...

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