Optical Components and Systems Companies Stocks – Back From a Very Dark Place

Earnings season is in full swing.  The optical component and systems companies have been reporting solid revenues for most of 2010 and Q4 results set new records for a change - after almost ten years of balance sheets with 650-nm wavelength ink!  The day after JDSU and Opnext reported earnings on Thursday 2/3/2011, their stocks increased by 20-30%. What is significant is virtually the entire datacenter, telecom optical components and systems group moved upwards within a few minutes of the market opening, signifying big money fund movements into this area.  Business for optical components, modules and systems companies has been improving steadily over at least 12 months. Nothing fundamentally changed last week, apart from the broader market taking notice of the situation and Wall Street analysts raising earnings estimates.

In early morning trading on Friday 2/4/2011, Finisar popped up 13% and hit nearly $40 up from $9 a year earlier. JDSU jumped 27% to an almost 52-week high at $22.8. Opnext, which had a difficult time in early 2010, being tied mainly to long haul networks and 40G, was up 29% on the day to $2.57. Positive guidance from JDSU on continuously improving margins and rapidly increasing sales of LTE, and 40 and  100 Gbps test equipment brightened the market outlook. Improving sales of test equipment is a clear indication that network operators are committed to deployments of next generation systems and significantly expanding network bandwidth.

LightCounting had been forecasting solid growth for the optical communication market and has pointed out that the cumulative bandwidth of the network (data rates of transceivers times the volume shipped) was not keeping up with the rise in internet and data center traffic. This analysis suggests that a period of increased investment in networking infrastructure will be necessary to catch up on several years on underinvestment and balance traffic growth and network expansion rates. Steadily increasing sales of optical amplifiers, ROADMs and more recently, tunable lasers and other transmission modules offer an early indication of the scale of upcoming network upgrades, which hold promise for the whole supply chain. (See LightCounting’s Market Forecast Report).

LightCounting also noted a significant jump in optical back haul components used to carry wireless tower traffic to the metro access network.  Many of these devices have been traditional 3Gbps SONET transceivers but a new crop of CPRI-protocol  6 Gbps transceivers have begun to show popularity in Asia.  Next stop will be 10 Gbps.  The boom in sales of iPhones, Andriod phones, and tablets such as the iPad have forced operators to upgrade their networks.  Verizon, which just started taking orders for Apple iPhone 4 on Thursday morning, announced later in the day that it had sold all its pre-order iPhones.  Verizon also announced that it would have to restrain the data rate of high usage iPhone users.  These new phones are enabling their owners to use lots of bandwidth.  This also signals that data traffic is spiking.

Massive upgrades to datacenters, which started in late 2009, accelerated in 2010. Shipments of 10 GigE and 8Gbps Fibre Channel SFP+ modules widely used for short reach interconnects increased 3 fold in 2010. First shipments of 40 GigE and even 100 GigE interfaces were also reported by suppliers in 2010. Detailed analysis of the optical communications market, based on confidential sales data provided by 23 leading vendors, is presented in a new LightCounting Market Update report released on January 24, 2011.

All these developments were finally recognized by the financial community last week. Here are a few highlights:

JDS Uniphase (Nasdaq: JDSU) closed at a 52 week high of $22.76, almost 27% over Thursday’s close, following a second quarter 2011 earnings report which produced EPS of $0.29 on revs of $473.5 million, versus the consensus EPS of $0.19 and revs of $437.7 million. JDSU sees Q311 revs of $440 - $460 million, versus the consensus outlook calling for revs of $420.8 million.

Finisar (Nasdaq: FNSR) jumped 5 points on the open and closed at $38.97, a 13% jump.

Opnext, Inc. (Nasdaq: OPXT) closed at 2.57, a jump of just over 29%, following a solid, though not perfect, Q3 report from the company. OPXT had a loss of $0.06 per share on revs of $97.1 million, compared to the consensus loss of $0.11 per share with revs of $90.23 million.

Oclaro . (Nasdaq: OCLR), closed at $15.88, up over 10% and just short of its 12 month high of $17.40.

NeoPhotonics (NYSE: NPTN), closed at $17.23, up 23% for the day and almost 30% since its IPO just a few days ago. The timing could not have been better for NeoPhotonics public offering.

Juniper (Nasdaq:JNPR) posted a (near) 52-week high closing at 40.06, up over 4%.

CIENA Corp. (Nasdaq: CIEN) closed at $26.90. Earnings expectations are now higher for the communications equipment company, which should report their earnings around March 3, 2011, 52 week range was 11.86 - 27.09

Alcatel Lucent  (NYSE:ALU) closed at $3.42 approaching its 52 week high of  $3.74, up 4.6%.

Extreme networks (Nasdaq: EXTR) posted a (near) 52-week high closing at $3.85, up 7.8%, with a 52 week range of $2.44 - $3.87.

Kimball Brown, LightCounting’s analyst that covers 10GBASE-T, Fibre Channel, FCoE and servers, and  who was  a sell side Wall Street analyst in another life stated, “Wow, what a day.  JDSU’s earnings on Thursday really lit a fire today”.  Lightcounting recently released a new report  on 10GBase-T adoption written by Kimball that takes a very different view from what other market research companies are portraying.  The 10GBase-T report explains the Intel “tick-tock” model in depth and its effect on the “Copper versus Optical” war in the data center.

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