Ever really looked at the margins earned by laser companies? And then looked at margins for companies like Cisco or Google? It's enough to make you weep.
Industrial laser company margins are modest but steady. The net profit margins for the industrial laser companies aren't too bad. Since 2006, gross margins on annual sales for Coherent, IPG Photonics, Newport, and Rofin are mainly in the 40-50% range. Operating margins range from single digits to 30-some percent. The net profit margins are mostly single digits to low teens (Coherent, Newport, and Rofin), while IPG is running lately at about 23%. Trumpf, which sells much more in machine tools than it does merchant lasers, used to have about 9-10% net profit margin, but suffered in the downturn and has recovered in the last fiscal year to 6.7%.
All in all, that's decent It's the telecom component suppliers that are really hurting.
Telecom supplier margins been mostly underwater until only recently. For Finisar, JDS Uniphase, Oclaro, and Opnext, the gross margins are lower, but it's the operating margins and net profit margins that are in the tank. Like, pretty much negative values for annual revenues since 2006. There's some improvement in the last year or so, with positive operating and net profit margins.
Now I know that these numbers are fraught with "yes, buts." These companies are generating cash flow, but their official, GAAP, unadulterated income statements show losses. And a company like JDSU is in multiple businesses. I'm lumping everything together.
Meanwhile, the customers reap the benefits. Now look at the customers. Cisco has gross margins in the 60% range, and net profit margins around 15-20%. That's net. EMC's net margin is running 12% this year. Juniper is 13%. The carriers aren't doing too badly either. AT&T is consistently in the teens and Verizon is in the single digits. And get this: Google's net margin is a running a whopping 27%!
So we know who is getting the margins. It's not the components companies. Nor is it Alcatel-Lucent or Ciena, who have had consistently negative margins too. It's the router and storage companies like Cisco and EMC, and the equipment users like Google and AT&T.
The component suppliers may finally be in positive territory for good. I hope so. It's not right that the customers get margins while the components companies don't.
Showing posts with label finance. Show all posts
Showing posts with label finance. Show all posts
Monday, October 17, 2011
Thursday, December 16, 2010
What a weak dollar means to photonics
The dollar has been declining steadily again (see figure) but how much difference does it make to lasers and photonics? A lot to any salesperson who is competing in an export business. A falling dollar is like a discount in the price given to the buyer. And it can mean a lot to the value that we analysts assign to markets (such as in our new market estimate). For example, a falling dollar inflates the value in dollars of the production of Japanese blue-violet diode lasers for Blu-Ray players. But it doesn't mean a lot overall, for a lot of reasons. Why is that?
The conventional wisdom is that a falling dollar makes U.S. goods and services cheaper abroad, and foreign goods and services more expensive in the U.S. That is, it makes U.S. goods more competitive, and it deflates U.S. debt owed others as counted in foreign currency.
But many companies don't sell directly to companies abroad. A more complete downstream product may be exported by the customer's customer, but either way, the effect may be minimal--or at least obscure--to the photonics manufacturer.
Second, companies commonly import subcomponents from all over the world. A lower dollar then raises the cost to manufacture, erasing some or all of the advantages when it exports the complete product.
And, a lot of companies manufacture in the destination markets. This can help hedge against changes in currencies, among other things. In the example of Japanese blue-violet diode lasers, it changes the average prices and overall value, in dollars, that we assign to a market. But that can seem rather artificial when most of the Blu-Ray players are assembled in Asia anyway.
More often, the gains and losses from a falling dollar amount mostly to changes in market share: U.S. companies vs. non-U.S. companies, and U.S. importers vs. U.S. exporters.
For an explanation how a falling dollar is unlikely to create many new jobs in the U.S., read this article. It cites the reasons above, and notes that much of U.S. manufacturing is capital intensive, not labor-intensive. And, many manufacturers are small and not likely to ramp up hiring dramatically even if sales do improve.
Just the same, every little bit helps, especially if it means tipping a business from the red to the black or deeper into the black.
The conventional wisdom is that a falling dollar makes U.S. goods and services cheaper abroad, and foreign goods and services more expensive in the U.S. That is, it makes U.S. goods more competitive, and it deflates U.S. debt owed others as counted in foreign currency.
But many companies don't sell directly to companies abroad. A more complete downstream product may be exported by the customer's customer, but either way, the effect may be minimal--or at least obscure--to the photonics manufacturer.
Second, companies commonly import subcomponents from all over the world. A lower dollar then raises the cost to manufacture, erasing some or all of the advantages when it exports the complete product.
And, a lot of companies manufacture in the destination markets. This can help hedge against changes in currencies, among other things. In the example of Japanese blue-violet diode lasers, it changes the average prices and overall value, in dollars, that we assign to a market. But that can seem rather artificial when most of the Blu-Ray players are assembled in Asia anyway.
More often, the gains and losses from a falling dollar amount mostly to changes in market share: U.S. companies vs. non-U.S. companies, and U.S. importers vs. U.S. exporters.
For an explanation how a falling dollar is unlikely to create many new jobs in the U.S., read this article. It cites the reasons above, and notes that much of U.S. manufacturing is capital intensive, not labor-intensive. And, many manufacturers are small and not likely to ramp up hiring dramatically even if sales do improve.
Just the same, every little bit helps, especially if it means tipping a business from the red to the black or deeper into the black.
Friday, July 16, 2010
What went wrong with GSI?
What’s going to happen to GSI? GSI announced in May that it would emerge from restructuring this summer. We got some interest this summer from investors checking out the laser market. One can imagine that some pieces of GSI will get traded. There will be news soon enough. As one of my smarter bosses used to say, “it will all become obvious” in due time.
The other question is, what went wrong? First, it got slammed in the downturn in the semiconductor and manufacturing sectors. Semiconductors turned down in 2007 and didn’t stop until last year. GSI is heavy into the semiconductor tool business, and it got hit hard. Equipment sales dropped as much as 90% or more from the peak. The rest of manufacturing turned down in 2008 with the recession. That business was hit with a 50% drop in equipment sales, plus or minus. That's brutal.
Second, GSI is really well positioned in lamp-pumped solid-state lasers, and it has a wide range of other laser and system products in many nice niches. But lamp-pumped lasers have been in a decline for several years while fiber lasers are on the rise. Lamp-pumped lasers won’t disappear, but it’s just not the place to be these days.
Finally, we’ve heard comments about certain decisions made by management along the way, particularly regarding the whole restatement thing. The gist of these comments is that the process was badly mishandled. It certainly made a bad situation worse, and it’s relevant enough. But, you expect Wall Street types to point that out first. They look at financial statements for a living.
To me, I take the macro, long-view perspective. The downturn came at great cost to companies and to the people who work in them. Some got caught out in the storm. Let’s hope that things work out for the best from here.
The other question is, what went wrong? First, it got slammed in the downturn in the semiconductor and manufacturing sectors. Semiconductors turned down in 2007 and didn’t stop until last year. GSI is heavy into the semiconductor tool business, and it got hit hard. Equipment sales dropped as much as 90% or more from the peak. The rest of manufacturing turned down in 2008 with the recession. That business was hit with a 50% drop in equipment sales, plus or minus. That's brutal.
Second, GSI is really well positioned in lamp-pumped solid-state lasers, and it has a wide range of other laser and system products in many nice niches. But lamp-pumped lasers have been in a decline for several years while fiber lasers are on the rise. Lamp-pumped lasers won’t disappear, but it’s just not the place to be these days.
Finally, we’ve heard comments about certain decisions made by management along the way, particularly regarding the whole restatement thing. The gist of these comments is that the process was badly mishandled. It certainly made a bad situation worse, and it’s relevant enough. But, you expect Wall Street types to point that out first. They look at financial statements for a living.
To me, I take the macro, long-view perspective. The downturn came at great cost to companies and to the people who work in them. Some got caught out in the storm. Let’s hope that things work out for the best from here.
Friday, June 4, 2010
Time for customers to pony up
There was news this week that Morgenthaler Ventures is ending its track for funding opto hardware start-up companies, mostly in silicon, but including optical components. This is not good news, to be sure, but maybe it's time again for the systems integrators to finally pony up for components research.
The conventional wisdom here in Silicon Valley is that venture-backed start-up companies form the engine of innovation for industries. The venture capitalists are nice enough to invest piles of money in component research, with the hope that they'll make even bigger piles for their investors, when they sell the start-up to a Cisco or an IBM, or they take it public.
Trouble is, I don't know how many times I've heard the systems integrators complain that they need new opto technology now. Not next year, not next month. Now! And these are the companies that are getting decent profit margins, unlike the components suppliers (don't make me name names, please). Well, if this stuff is so darned vital, the systems vendors should be willing to pay big bucks for it, right?
The VCs aren't investing in optical communication components because they don't see the return in it. If things get bad enough, the integrators will have to take on more risk. If that becomes too expensive, maybe they didn't really need it today, or even tomorrow. My bet is that they do need it, but were happy to let someone else pay for the development.
The wild card is whether some Asian government, such as Korea or China, will fill the gap in funding and gain a permanent advantage in the components market. If you think that the venture financing model is driven by a herd mentality or is too narrowly focused to be effective, then that may well happen. But if you think that, for all of its faults, the VC model is mostly rational and market driven, then it's just China's money getting wasted, to the benefit of the systems vendors.
The conventional wisdom here in Silicon Valley is that venture-backed start-up companies form the engine of innovation for industries. The venture capitalists are nice enough to invest piles of money in component research, with the hope that they'll make even bigger piles for their investors, when they sell the start-up to a Cisco or an IBM, or they take it public.
Trouble is, I don't know how many times I've heard the systems integrators complain that they need new opto technology now. Not next year, not next month. Now! And these are the companies that are getting decent profit margins, unlike the components suppliers (don't make me name names, please). Well, if this stuff is so darned vital, the systems vendors should be willing to pay big bucks for it, right?
The VCs aren't investing in optical communication components because they don't see the return in it. If things get bad enough, the integrators will have to take on more risk. If that becomes too expensive, maybe they didn't really need it today, or even tomorrow. My bet is that they do need it, but were happy to let someone else pay for the development.
The wild card is whether some Asian government, such as Korea or China, will fill the gap in funding and gain a permanent advantage in the components market. If you think that the venture financing model is driven by a herd mentality or is too narrowly focused to be effective, then that may well happen. But if you think that, for all of its faults, the VC model is mostly rational and market driven, then it's just China's money getting wasted, to the benefit of the systems vendors.
Tuesday, November 17, 2009
Who's ahead in photonics stocks
In the last post, I noted that some photonics stocks have done nicely in 2009 following the crash one year ago. My very cursory examinations suggests that a few companies in the LED space are doing very nicely indeed. Other are making good progress toward their 2007 and 2008 levels, even if there is a way to go.
Why it matters. A rising stock market is a sign that investors think that earnings (that is, profits) will rise over coming years. It also makes all those pesky owners happy so that layoffs will stop and staff can breathe easier. And sometimes the employee is one of those owners (or has an option to become one). So, a rising stock price is usually good news, provided you remember that it is a secondary market, something of a beauty contest. Not being a Wall Street financial analyst type, I generally stay away from following stock prices, but sometimes it's illuminating.
High fliers. One of the stars right now is Cree, the LED supplier. Its stock price has tripled from its low, and is well above its 2008 peak. Aixtron is even better, at about 6X above its low, and double its 2008 peak. Cymer has doubled to recover to its 2007 level. I think it's safe to say these stocks are ahead of the overall market average, although it depends on where you start counting.
Holding their own. Others are holding their own against the NASDAQ average. Omnivision is up about 3-4X from its low, more or less in its earlier territory. Coherent has approximately doubled, getting closer to its usual territory. FLIR hasn't reached its all-time peak, but it's back to some of its 2008 level. IPG is getting there.
In the dog house. Some companies seem to be in a long U-shaped recession, well below the overall stock market. Rofin is deep into manufacturing, where the stock market doesn't expect good earnings for a while. Telecom system vendors like Alcatel-Lucent, Ciena, and Infinera are also well below the NASDAQ average for the period. Especially Infinera.
What about P/E ratios? High prices are nice, but what about the P/E ratio? That would say something about the kind of stock bargains that are out there. Here the news isn't so good. High-flying Cree is at 94 today. Cymer is near 300, Rofin at 75. But this is hardly fair, since these companies actually have positive earnings even now, and while many others don't. More down-to-earth, by the way, is FLIR, at a P/E ratio of 20.
I couldn't post the Yahoo graphs into this blog, but you can run the charts yourself here.
Why it matters. A rising stock market is a sign that investors think that earnings (that is, profits) will rise over coming years. It also makes all those pesky owners happy so that layoffs will stop and staff can breathe easier. And sometimes the employee is one of those owners (or has an option to become one). So, a rising stock price is usually good news, provided you remember that it is a secondary market, something of a beauty contest. Not being a Wall Street financial analyst type, I generally stay away from following stock prices, but sometimes it's illuminating.
High fliers. One of the stars right now is Cree, the LED supplier. Its stock price has tripled from its low, and is well above its 2008 peak. Aixtron is even better, at about 6X above its low, and double its 2008 peak. Cymer has doubled to recover to its 2007 level. I think it's safe to say these stocks are ahead of the overall market average, although it depends on where you start counting.
Holding their own. Others are holding their own against the NASDAQ average. Omnivision is up about 3-4X from its low, more or less in its earlier territory. Coherent has approximately doubled, getting closer to its usual territory. FLIR hasn't reached its all-time peak, but it's back to some of its 2008 level. IPG is getting there.
In the dog house. Some companies seem to be in a long U-shaped recession, well below the overall stock market. Rofin is deep into manufacturing, where the stock market doesn't expect good earnings for a while. Telecom system vendors like Alcatel-Lucent, Ciena, and Infinera are also well below the NASDAQ average for the period. Especially Infinera.
What about P/E ratios? High prices are nice, but what about the P/E ratio? That would say something about the kind of stock bargains that are out there. Here the news isn't so good. High-flying Cree is at 94 today. Cymer is near 300, Rofin at 75. But this is hardly fair, since these companies actually have positive earnings even now, and while many others don't. More down-to-earth, by the way, is FLIR, at a P/E ratio of 20.
I couldn't post the Yahoo graphs into this blog, but you can run the charts yourself here.
Monday, November 16, 2009
The photonics market, one year later
Do you believe the stock market, GDP, or unemployment figures? Are we in a recovery, or still in recession? V-shaped, W-shaped, or U-shaped? As we do our annual survey and forecast for Laser Focus World magazine and the upcoming Marketplace Seminar, a lot of this gets mixed up. There will be more to come later, but here are some early thoughts.
Many public photonics companies have seen great stock returns. The stock market looks at future earnings--that is, profits--regardless of jobs or where the jobs are. A rising market says that investors think the future is good, and it's good for employee stock options and so forth. Some photonics stocks have shot way up, well beyond the average. LED companies in particular. Even those that haven't are seeing a bounce off the bottom, suggesting that it won't get worse. Stay tuned to this blog for more on this.
Small photonics companies span the spectrum. The stock market doesn't say anything about small businesses, but there are far more small, private photonics companies than public ones. I love these companies because many are much more profitable than their more visible brethren. For example, think of suppliers for military contracts, medical systems, and so forth. But, small businesses have very little wiggle room in a recession like this. California public radio explained it well in a piece today, using the example of a maker of tortilla-making equipment that sells for up to $3 million. It has gone from 55 employees to 9, and still has problems getting credit a year into the crisis.
Large capital equipment to make large capital equipment is hit hardest. The radio piece highlights a point I've been making, that the recession will be especially long for companies that make large capital equipment, and especially large capital equipment that makes large capital equipment. So for example, the market for welding systems for making cars is likely to be slow for another year or two, while the LED market will jump ahead next year.
Use economic indicators with caution. Use economic indicators with caution. One tool for forecasting is to look at economic indicators. Of course, they are complicated, but they can be very useful. But you do need to understand some of the limitations of the indicators, though. For example, Joe Webb points out in his blog article for the print industry how leading indicators often get it wrong. The blog piece is appropriately titled, "Beware the Cheerleaders."
Many public photonics companies have seen great stock returns. The stock market looks at future earnings--that is, profits--regardless of jobs or where the jobs are. A rising market says that investors think the future is good, and it's good for employee stock options and so forth. Some photonics stocks have shot way up, well beyond the average. LED companies in particular. Even those that haven't are seeing a bounce off the bottom, suggesting that it won't get worse. Stay tuned to this blog for more on this.
Small photonics companies span the spectrum. The stock market doesn't say anything about small businesses, but there are far more small, private photonics companies than public ones. I love these companies because many are much more profitable than their more visible brethren. For example, think of suppliers for military contracts, medical systems, and so forth. But, small businesses have very little wiggle room in a recession like this. California public radio explained it well in a piece today, using the example of a maker of tortilla-making equipment that sells for up to $3 million. It has gone from 55 employees to 9, and still has problems getting credit a year into the crisis.
Large capital equipment to make large capital equipment is hit hardest. The radio piece highlights a point I've been making, that the recession will be especially long for companies that make large capital equipment, and especially large capital equipment that makes large capital equipment. So for example, the market for welding systems for making cars is likely to be slow for another year or two, while the LED market will jump ahead next year.
Use economic indicators with caution. Use economic indicators with caution. One tool for forecasting is to look at economic indicators. Of course, they are complicated, but they can be very useful. But you do need to understand some of the limitations of the indicators, though. For example, Joe Webb points out in his blog article for the print industry how leading indicators often get it wrong. The blog piece is appropriately titled, "Beware the Cheerleaders."
Even as we all bask in the news that the economy grew last quarter, economists are working to correct errors that likely overstate the value of GDP growth. When goods and services are moved offshore, the total value may be counted in the current accounts, but it may not be allocated correctly to specific industries. It's as if you compare two companies that manufacture in China: one outsources it while the other operates it itself. The productivity of the former would look better than the latter if you don't count the outsourced labor.
A similar issue arises when you look at the trade deficit but not the entire current accounts, or for that matter, capital accounts. So what if iPhones are made in China? China adds only a few percent of the value, Japan adds much more, but the U.S. captures as much as 50% of the retail value. Yet, it looks as if it is imported from China so the other contributions are lost in our trade statistics. It should wash out in China's numbers, but not all of it will wash out in the U.S. numbers. But that is part of a very large topic, better saved for another time.
Friday, July 10, 2009
How photonics can learn from Two Buck Chuck
Recent news about the crash of the Australian wine business fulfills a prophecy I heard years ago, and highlights parallels to the photonics business. How so? For starters, both carry a certain prestige, but deep down, wine is really about agriculture and photonics is really about manufacturing. Let me explain.
One of my favorite characters in the wine industry is Fred Franzia, famous for his Charles Shaw wine, better known as Two Buck Chuck. He's the guy that Napa Valley loves to hate, and he loves that they do. He boldly claimed several years ago that the Australian wine business would one day crash because they were planting too many grapes and financing with debt. At some point the world market would go through one of its inevitable cycles, prices would fall, and they wouldn’t be able to meet their fixed costs.
Sound familiar? A recent article cites some other familiar factors: relatively high labor costs, an unfavorable exchange rate, and over-association with a single, lower-end brand.
All of this has been said at one time or another about photonics companies. Especially the part about overplanting. Who in photonics doesn't dream of starting a company developing high end cool stuff, ramp quickly, and make a ridiculously prosperous exit. It's happened enough to prove that it can. However, the reality is that it usually takes years to build up the business, and a lot of it is about as glamorous as pulling weeds.
In the wine industry, you don’t start by selling high end wines to collectors. You start by selling bulk grapes. Maybe you can begin making your own wine, or at least contract it out. Then maybe you do some bottling and run a small tasting room on the side. Eventually you may be able to get out of the low-end grapes altogether, except to sell off overstock. That’s if a downturn doesn’t force you to sell out to a large corporation.
I hate to say it, but the photonics business could learn a lot from Fred Franzia. I hate to say it because Franzia is on a crusade to take away the pretense in wine, while many people are obvioulsy willing to pay top dollar for pretense. And in photonics, too, not only is there is a place for suppliers of low volume, specialty products, but I'm hope that everyone can enjoy the highest margins possible.
You can learn everything you need to know from Fred Franzia in this colorful interview in 2007.
One of my favorite characters in the wine industry is Fred Franzia, famous for his Charles Shaw wine, better known as Two Buck Chuck. He's the guy that Napa Valley loves to hate, and he loves that they do. He boldly claimed several years ago that the Australian wine business would one day crash because they were planting too many grapes and financing with debt. At some point the world market would go through one of its inevitable cycles, prices would fall, and they wouldn’t be able to meet their fixed costs.
Sound familiar? A recent article cites some other familiar factors: relatively high labor costs, an unfavorable exchange rate, and over-association with a single, lower-end brand.
All of this has been said at one time or another about photonics companies. Especially the part about overplanting. Who in photonics doesn't dream of starting a company developing high end cool stuff, ramp quickly, and make a ridiculously prosperous exit. It's happened enough to prove that it can. However, the reality is that it usually takes years to build up the business, and a lot of it is about as glamorous as pulling weeds.
In the wine industry, you don’t start by selling high end wines to collectors. You start by selling bulk grapes. Maybe you can begin making your own wine, or at least contract it out. Then maybe you do some bottling and run a small tasting room on the side. Eventually you may be able to get out of the low-end grapes altogether, except to sell off overstock. That’s if a downturn doesn’t force you to sell out to a large corporation.
I hate to say it, but the photonics business could learn a lot from Fred Franzia. I hate to say it because Franzia is on a crusade to take away the pretense in wine, while many people are obvioulsy willing to pay top dollar for pretense. And in photonics, too, not only is there is a place for suppliers of low volume, specialty products, but I'm hope that everyone can enjoy the highest margins possible.
You can learn everything you need to know from Fred Franzia in this colorful interview in 2007.
Tuesday, June 23, 2009
The Newport-Oclaro swap--Tipping the scales, a return to bartering
Ever since the announcement that Newport will give its diode business and $3 million in cash to Oclaro in exchange for its New Focus operation, opinions have been all over the map: from Newport is crazy to give up its internal diode business, to Newport got the better deal. The bottom line? I think it will tip the scales against the least competitive players.
Here’s how it works. Newport’s laser group, Spectra-Physics, got its diode business in 1992 when it acquired OptoPower, located in Tucson, Arizona. For years there was an industry-held view that the diode-pumped laser makers needed to control the diode pump technology so vital to the solid-state lasers. Today, the big laser companies like Coherent, TRUMPF, Rofin-Sinar, and IPG Photonics all pretty much make all their own diodes.
Fabs, though, are very expensive operations, costing as much as $30 million or more per year, depending on what you're counting. A classic way to make that work is to get volume through the fab--increase the capacity utilization. But with well over a dozen competitors and a slow market, that's hard to do, and everyone knows it. Spectra's diode operation has certainly seen better days, now that its assembly operations have moved to China and sales are soft for everyone.
Meanwhile, Bookham (now Oclaro) has two gold-plated fabs, a GaAs fab in Zurich and an InP fab in Caswell, UK. By shutting down the Spectra diode fab in Tucson and making the diodes in its own fab, Bookham can get much better returns out of its capital. The new volume could even be low margin chips, as long as it helps keep the lights on. Moreover, even Bookham's competitors regard Bookham's R&D highly. And Oclaro is hoping that it can be *the* independent diode supplier to the solid-state laser makers.
It all sounds good, but competitors are quick to take pot shots at the deal.
For its part, Coherent is keen on keeping its diode manufacturing in-house, in part because it also makes its OPSL gain chips in its fab with its high power diodes. Thus, while Spectra's fab may no longer be as integral to its overall laser business, Coherent's fab is. And the other big laser companies (Trumpf, Rofin, and IPG) are all quite religious about controlling the supply of key components and keeping their fabs in-house.
Others suggested that Newport gets a solid business from New Focus (albeit one that is reportedly losing money at the moment), while Bookham-Oclaro could very easily fumble the diode business it's taking over.
This is all true, although I would add that at least it plays to a larger strategy for Oclaro. Oclaro shows that it has a plan for its diode business. That's better than no plan.
One thing that everyone agrees on is that the New Focus operation fits better with Newport, even though it's reported to be losing money. And it’s something of a completed circle for New Focus, since one of the founders (in 1990) was Milton Chang, already then a former CEO of Newport.
As for the remaining competitors, one less high-power diode fab has to be viewed as a good thing. Of course, Bookham/Oclaro aims to get most of the benefit from that, which is to say that it makes it all the harder for the least competitive suppliers—it tips the scales against them.
Finally, you have to wonder what this says about the state of the industry when a major deal amounts to a barter, with almost no cash or stock involved. Of course, all deals are swaps of some kind, but bartering is considered the most primitive form of trade--a pre-monetary transaction that happens in primitive societies and war zones. The value of the diode laser business is evidently so low that a monetary or stock transaction these days is out of the question, and perhaps only a trade of this kind can go forward.
Here’s how it works. Newport’s laser group, Spectra-Physics, got its diode business in 1992 when it acquired OptoPower, located in Tucson, Arizona. For years there was an industry-held view that the diode-pumped laser makers needed to control the diode pump technology so vital to the solid-state lasers. Today, the big laser companies like Coherent, TRUMPF, Rofin-Sinar, and IPG Photonics all pretty much make all their own diodes.
Fabs, though, are very expensive operations, costing as much as $30 million or more per year, depending on what you're counting. A classic way to make that work is to get volume through the fab--increase the capacity utilization. But with well over a dozen competitors and a slow market, that's hard to do, and everyone knows it. Spectra's diode operation has certainly seen better days, now that its assembly operations have moved to China and sales are soft for everyone.
Meanwhile, Bookham (now Oclaro) has two gold-plated fabs, a GaAs fab in Zurich and an InP fab in Caswell, UK. By shutting down the Spectra diode fab in Tucson and making the diodes in its own fab, Bookham can get much better returns out of its capital. The new volume could even be low margin chips, as long as it helps keep the lights on. Moreover, even Bookham's competitors regard Bookham's R&D highly. And Oclaro is hoping that it can be *the* independent diode supplier to the solid-state laser makers.
It all sounds good, but competitors are quick to take pot shots at the deal.
For its part, Coherent is keen on keeping its diode manufacturing in-house, in part because it also makes its OPSL gain chips in its fab with its high power diodes. Thus, while Spectra's fab may no longer be as integral to its overall laser business, Coherent's fab is. And the other big laser companies (Trumpf, Rofin, and IPG) are all quite religious about controlling the supply of key components and keeping their fabs in-house.
Others suggested that Newport gets a solid business from New Focus (albeit one that is reportedly losing money at the moment), while Bookham-Oclaro could very easily fumble the diode business it's taking over.
This is all true, although I would add that at least it plays to a larger strategy for Oclaro. Oclaro shows that it has a plan for its diode business. That's better than no plan.
One thing that everyone agrees on is that the New Focus operation fits better with Newport, even though it's reported to be losing money. And it’s something of a completed circle for New Focus, since one of the founders (in 1990) was Milton Chang, already then a former CEO of Newport.
As for the remaining competitors, one less high-power diode fab has to be viewed as a good thing. Of course, Bookham/Oclaro aims to get most of the benefit from that, which is to say that it makes it all the harder for the least competitive suppliers—it tips the scales against them.
Finally, you have to wonder what this says about the state of the industry when a major deal amounts to a barter, with almost no cash or stock involved. Of course, all deals are swaps of some kind, but bartering is considered the most primitive form of trade--a pre-monetary transaction that happens in primitive societies and war zones. The value of the diode laser business is evidently so low that a monetary or stock transaction these days is out of the question, and perhaps only a trade of this kind can go forward.
Tuesday, May 5, 2009
Some thawed spots in small company financing
The venture finance folks have been saying that money for start-ups is tight, and especially hard for brand new ventures. So it's heartening to hear about companies getting any kind of funding in a time like this. Maybe the financing hasn't thawed, but it's not completely frozen either.
If you dig around, the stories are there. In April, Powerlase got a chunk of money for its business in lasers. In March, One-Chip Photonics received nearly $20 million that was promised to them for meeting a milestone in photonic integrated circuits. In January, nLight got about $11 million for its business in lasers and laser components. In December, Pixim received $13 million in funding for its business in image sensors for security cameras. In November, Raydiance got $20 million for its work in ultrafast lasers. The biomedical sector continues to do particularly well. Recently three bio-optics startups received a total of $38 million in financing: AOptix Technologies, BiOptix Diagnostics, and LensX Lasers (putting an x in your company name is evidently the new fashion). And there are more.
The companies are quick to boast that they are still a good investment, but there is always more to the story, to be sure. For one thing, companies don't disclose the terms of the deals. And some have asked me, if they are doing so well, why do they need the money?
But the investors are putting what money they have into the companies they believe in the most. That's worth noticing.
By the way, if you want to read some interesting comments from a VC's perspective, see Larry Marshall's VC View blog at the Laser Focus World web site. For example, here's "What VC's actually do in a down market."
If you dig around, the stories are there. In April, Powerlase got a chunk of money for its business in lasers. In March, One-Chip Photonics received nearly $20 million that was promised to them for meeting a milestone in photonic integrated circuits. In January, nLight got about $11 million for its business in lasers and laser components. In December, Pixim received $13 million in funding for its business in image sensors for security cameras. In November, Raydiance got $20 million for its work in ultrafast lasers. The biomedical sector continues to do particularly well. Recently three bio-optics startups received a total of $38 million in financing: AOptix Technologies, BiOptix Diagnostics, and LensX Lasers (putting an x in your company name is evidently the new fashion). And there are more.
The companies are quick to boast that they are still a good investment, but there is always more to the story, to be sure. For one thing, companies don't disclose the terms of the deals. And some have asked me, if they are doing so well, why do they need the money?
But the investors are putting what money they have into the companies they believe in the most. That's worth noticing.
By the way, if you want to read some interesting comments from a VC's perspective, see Larry Marshall's VC View blog at the Laser Focus World web site. For example, here's "What VC's actually do in a down market."
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