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  • A Story of Transformation in the Optical Industry

Photonics Spectra
Mar 2011
Alain Couder, Oclaro Inc.

The optical communications market has experienced substantial growth in recent years, demonstrating a significant turnaround since 2000, when the industry was at the nadir of the dot-com bust because of the massive build-out of high-speed optical communications equipment. Ten years ago, about 1000 companies competed for market share in a steeply declining arket, bleeding cash with intensive and redundant investments in R&D and capital. By 2010, that number had declined to about 200, with only a handful enjoying the strategic customer relationships and financial wherewithal to invest and grow.

This industry consolidation is now bearing fruit, as optical providers are improving their financial models to reach sustainable levels that allow them to continue to reinvest in innovation and capacity expansion. One company in particular has completely transformed itself into a major player in this market over the past several years: Oclaro, created through the merger of Bookham and Avanex in early 2009, has been executing against a deliberate strategy to be the predominant force in the fiber optics industry, driving further industry consolidation and outdistancing the competition with a broad portfolio of products and technology innovation.

By implementing successful growth strategies, Oclaro has seen revenues increase by more than 40 percent year over year (FYQ1 2010 compared with FYQ1 2011), with positive EBITDA (earnings before interest, taxes, depreciation and amortization) and gross margin performance, and a strong balance sheet with no debt. We are now on an ambitious path to capitalizing on our increased addressable market with a goal of reaching $1 billion in revenue in 2013, combined with a steadfast determination to be the easiest company in the industry to do business with.


One product that has helped Oclaro stay viable in a down economy is its full-band-tunable, small-form-factor 300-pin MSA-compliant transponder.


Demand for bandwidth and low latency in the core network continues to explode, with video services, cloud computing, voice over Internet protocol and other services continually driving more network traffic through the core. Recently, the telecom market has started to expand beyond the small number of very large OEMs to captive networks, created solely for in-house use by large video services, and search engine and cloud computing companies. In addition, the changing needs of the Internet are driving an evolution in network topologies.

This evolution, combined with the dramatic increase in the need for bandwidth and reduced latency, has created opportunities for new optical technologies and component innovations. In addition, outside of telecommunications, new high-volume applications are emerging for lasers, which have reached price points for mass adoption. New markets include home and professional hair removal, laser surgery and other medical applications, and the transition to optical interconnects, which are starting to replace electrical interconnects in consumer and computer applications.

To capitalize on these industry trends, Oclaro (known as Bookham back in 2007) recognized that we would require a complete product portfolio – from components to subsystems – to drive innovation for our telecommunications customers. And we needed to diversify and expand into adjacent markets to ensure adequate scale to fully utilize our world-class fabrication and back-end manufacturing facilities. We also had to leverage those capabilities as a source of competitive differentiation. Finally, we endeavored to create a unique and compelling corporate culture that would enable us to motivate, attract and retain the best and brightest minds in the photonics industry.

The first step was the merger between Bookham and Avanex, which united the components expertise of Bookham with the modules and subsystems expertise of Avanex, establishing Oclaro as a tier-one leader in the long-haul and metro telecommunications market. By the fourth quarter of fiscal 2010, we exceeded our gross margin and operating margin goals that were set at the announcement of the merger. Next, to further diversify our business and more fully leverage our manufacturing facilities, Oclaro swapped the New Focus business for the Newport Spectra-Physics high-power laser diodes business. The acquisition of the Newport Spectra-Physics diode line established Oclaro as the largest merchant provider of high-power laser diodes in the industry, a product line highly complementary to our single-emitter and bars products and bringing new growth opportunities to us in the medical, printing and industrial applications in Japan and North America.

To expand our product portfolio further and to deliver a complete solution, late in 2009 we acquired Xtellus, bringing us a complete family of wavelength-selective switches (WSS) that can power reconfigurable optical add/drop multiplexer (ROADM) applications over the entire optical network, from the edge to the core. Combining the WSS portfolio with Oclaro’s integrated subsystem design capability also positioned the company well in the high-growth ROADM market.

The acquisition also further deepened our technology arsenal, including liquid crystal and microelectromechanical systems capabilities. Finally, in mid-2010, we purchased Mintera, a privately held leader in high-performance optical transport subsystems solutions. That acquisition further broadened Oclaro’s product portfolio for high-speed, 40-Gb/s telecommunications and positioned us well to accelerate the development of 100-Gb/s solutions. It also bolstered our ability to provide complete 40-Gb/s subsystem solutions to customers who want faster time to market, and to continue to develop innovative 40-Gb/s optical components for customers who choose to do their own subsystem design.

As a result of these acquisitions, Oclaro now has one of the most complete product portfolios in the industry to serve the core optical network market, with the scale necessary to fully leverage our manufacturing capabilities to achieve our financial objectives, better serve our customers and invest in the next generation. With the expanded product portfolio, we are well positioned to grow at a substantial pace over the next two years.

In addition to expanding our product portfolio and addressable market through 2010, we also restructured our balance sheet to position us for future success. In one of the most turbulent weeks in the history of the stock market, Oclaro completed an oversubscribed secondary offering of common stock, adding $77 million to our balance sheet – which today is very strong, with no debt – and we are funding our own investments.

As a result of Oclaro’s financial stability and breadth of portfolio, we are now a top-tier vendor and a respected partner of top-tier customers, a status enjoyed by only a handful of optical component suppliers to the telecom business. Through the integration process, we have established a powerful corporate culture based on three core values: Be respectful, be ready to help and be inventive. This culture is fully aligned to outdistance the competition by being the easiest company to do business with; having architectural clairvoyance so we can anticipate and drive the future directions of our markets; leveraging our vertical integration from chips to subsystems as a key differentiator; and being innovative in everything we do.

We believe that we are poised to outperform the overall market as a result of our product breadth, deep customer relationships, technology innovation and expertise, and manufacturing scale. We have set an ambitious goal to hit the $1 billion revenue mark within the next two years. With the building blocks we now have in place, Oclaro is well positioned to be the leading provider of photonic solutions to the large and growing markets for lasers, optical components and subsystems.

Meet the author

Alain Couder is president and CEO of Oclaro Inc. in San Jose, Calif.; e-mail: alainc@oclaro.com.


GLOSSARY
liquid crystal
A type of material that possesses less geometrical regularity or order than normal solid crystals, and whose order varies in response to alterations in temperature and other quantities. Liquid crystals are characterized by phase varieties, including cholesteric, nematic and smectic. The optical properties of liquid crystals are familiar from their use in displays, known as LCDs.
optical communications
The transmission and reception of information by optical devices and sensors.
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