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Jump-start your IPO portfolio with New Focus!
by Siu-Yee Ng
The Internet has become an essential communications and transaction tool with increased data traffic. The volume of high-speed traffic over communications networks continues to grow dramatically, outpacing that of traditional voice traffic. According to International Data Corporation, the number of Internet users worldwide reached approximately 142 million in 1998 and is forecasted to grow to approximately 502 million users by the end of 2003.
According to Ryan, Hankin & Kent (RHK), the Internet and other data traffic is expected to increase 8,100% between 1999 and 2003.
This growth is primarily attributable to increasing consumer and business use, easier and cheaper access to the Internet and the large and growing number of personal computers in the home and workplace.
E-commerce in particular is generating enormous data traffic over communications networks as it becomes a critical strategic element of many businesses. Network service providers have had difficulty in meeting this increased demand due to significant constraints on high-speed access from existing communications infrastructure, which was originally designed to carry only voice traffic. Such constraints have caused network congestion, decreased reliability and made it difficult for network service providers to upgrade networks effectively.
To alleviate this bottleneck, network service providers are increasingly deploying next-generation optical networks that address the demand for high-speed communications. Optical networks transmit data by pulses of light through an optical fiber. Light in a glass medium can carry more information over longer distances than electrical signals over a copper medium. Optical signals are generated by lasers that produce light at specific colors, or wavelengths.
A variety of other fiber optic components are used to create, combine, isolate, amplify, split, channel and perform various other functions on these optical signals. Fiber optic components are split into two broad categories: actives, or opto-electronics, which process both optical and electrical signals, and passives, which process only optical signals.
Innovations at the fiber optic component level have historically enabled a number of major advances in optical networking systems. Traditionally, optical signals at only a single wavelength, or channel, were used to carry information in optical networks. With the invention of innovative components capable of separating light into different specified wavelengths for transmission in an optical fiber, network systems vendors began developing enhanced equipment, including wavelength division multiplexing (WDM) systems, which increased network capacity.
WDM solutions do this by transmitting data simultaneously on a number of different wavelengths along the same optical fiber. At the destination, these wavelengths are separated and the data extracted. Therefore, WDM technology increases the bandwidth of an optical network in proportion to the number of wavelengths transmitted. In addition to increasing the number of channels, component innovation has also resulted in an increase in the amount of data that can be transmitted per channel, or data rate.
Network service providers are continually upgrading the data rates of their optical networks. With increased data rates and numbers of channels, the amount of data processed by network equipment has increased dramatically. As the data rate and bandwidth between network equipment sites has expanded, the data rate between the equipment within these sites has not kept pace. As a result, there is increasingly a need for high data rate connections to link the equipment within a network service provider's site.
Component innovations have also led to the development of the fiber amplifier, resulting in a dramatic increase in the distance over which optical signals can be transmitted without regeneration, which is the process of converting signals from optical to electrical and back to optical to restore signal quality and strength. Regeneration requires large, expensive equipment, often in remote locations, which can be costly to deploy, operate and maintain.
Fiber amplifiers restore the signal strength without regeneration and significantly lower equipment, operations and maintenance costs. Prior to the development of fiber amplifiers, signal attenuation or loss limited the distance over which an optical signal could be transmitted without regeneration (reach) to approximately 70 kilometers. With fiber amplifiers, the reach of optical networks has increased to thousands of kilometers.
With improvements in fiber amplifiers, network equipment manufacturers are developing longer reach capability that has led to, among other things, all-optical networks that operate without any regeneration. These all-optical networks depend on advanced fiber optic components to enable extremely long reach. Service providers are demanding optical networks with higher channel counts to increase bandwidth. However, with current WDM technology, the number of wavelengths that can be transmitted (channel count) is limited.
Current WDM technology requires that data be transmitted within a defined range of wavelengths and with a large space between each channel. These limitations constrain channel count and the overall bandwidth. Network equipment providers can increase the channel count by extending the range of wavelengths over which data can be transmitted. At the same time, reducing the spacing between channels with dense wavelength division multiplexing (DWDM) can also increase channel count.
According to RHK, the market for DWDM optical components is expected to grow at a compound annual growth rate of 51% from 1999 to 2003. As wavelength range and channel counts increase, service and network equipment providers will also need to effectively manage the increasingly complex flow of high-speed optical signals in a vast number of wavelengths.
Future systems will continue to require higher data rates to handle the rapid growth in data traffic. Growth in data traffic and price competition in the telecommunications market increasingly requires service providers to seek solutions that reduce their overall network cost-of-ownership.
In addition to the basic cost of equipment, service providers incur substantial costs in terms of space required to deploy the equipment, power consumption and on-going operations and maintenance. In order to continue to grow and upgrade their networks to meet higher traffic demands in a cost-effective manner, service providers need compact, low consumption equipment.
Opportunity knocks
New Focus, Inc. (NUFO-NASDAQ) designs, manufactures and markets innovative fiber optic products for next-generation optical networks under the Smart Optics for Networks brand. The company helps networking solutions with increased channel counts, higher data rates, longer reach lengths and new services which reduce overall network cost of ownership.
Its wavelength management and fiber amplifier products enable systems with extended fiber bandwidth, thereby increasing the efficiency of optical networks by transmitting a greater number of wavelengths in a single optical fiber. New Focus' wavelength management products also enable network DWDM systems to accurately, efficiently and reliably manage the vast number of optical signals by separating these signals into different paths that can be processed individually.
The company's interleavers are designed to double the capacity of DWDM systems by doubling the number of channels operating on a single fiber. Its WDM couplers are used to split optical signals on a single fiber into two different wavelengths on two fibers, enabling them to be processed on an individual basis. Its optical circulators are used for directing optical signals into the appropriate sections of a fiber amplifier and offer wide wavelength operation to accommodate many optical channels.
These circulators enable next-generation fiber amplifiers to amplify signals at multiple wavelength bands and signals travelling in both directions along a fiber. New Focus' high-speed opto-electronics enable its customers to solve the bandwidth bottleneck between equipment within a network service provider's site. Its 10 gigabits per second (Gbps) transceivers are designed to be low cost, small sized and low-power solutions. Its advanced photonics tools enable network service and equipment providers to develop and test their next-generation offerings, including OC-768 products.
Speed racer
New Focus' fiber amplifier products enable the transmission of information at very high speeds over extended distances. Its products reduce the expense associated with amplification and regeneration equipment by extending the distances over which an optical signal can be transmitted. They offer wide wavelength range and low loss that enable the high power amplification needed to drive optical signals for the very long distances associated with next-generation all-optical networks.
Its products also enable network equipment manufacturers and service providers to offer products capable of managing and flexibly delivering bandwidth at the fiber optic component level. New Focus' optical circulators enable equipment capable of delivering or dynamically adding and dropping a single wavelength at any point in the network. Its tunable lasers are being developed to enable flexible networks that can be reconfigured to address changing data traffic patterns.
Its products help reduced overall network cost-of-ownership. The products are designed with compact form factor and low power consumption to reduce system space and power requirements. They are made for high volume manufacturing and offer several different lines utilizing the same or similar fiber optic packaging, thereby decreasing cost. Its fiber amplifier products increase the reach and number of channels within a DWDM network, reducing the expense of signal amplification and regeneration.
Buyers and sellers
New Focus sells its fiber optic products to network equipment providers and its advanced photonics tools to suppliers of components, systems and services-related products in the optical networking industry. Over 50 customers have bought its products, such as Agilent Technologies, Alcatel, Avanex Corporation, Corning Incorporated and Lucent Technologies.
Products are primarily sold through a direct sales force. Its efforts are focused on service providers and optical network equipment manufacturers. The company's direct sales account managers cover the market on an assigned account basis.
New Focus only recently began selling its fiber optic products to the telecommunications industry, and revenues from the sale of these products were generated since March 1999. Total net revenues for the nine-month period ended December 31, 1999, were $18.1 million, of which $5.0 million, or 27.6% of total net revenues, were from sales of its telecom products.
Net revenues of $15.5 million in fiscal 1998 and $17.3 million in fiscal 1999 were generated from sales of its commercial photonics products. Net revenues increased in each of the previous seven quarters, with the exception of the quarter ended June 30, 1999. In that quarter, New Focus experienced component supply and integration issues related to new versions of some of its commercial photonics products, which affected its ability to meet demand. These issues were addressed in the following quarter with refined and improved manufacturing processes.
New Focus is expanding into China this year, so we'll have to keep an eye on this development.
Leaders phoning home
The president, CEO and director served since November 1997. Prior to joining New Focus, he spent nine years at Cornerstone Imaging, Inc. where he held positions as senior vice president, general manager of display division and managing director for Europe. He has nearly 20 years" experience managing different aspects of technology start-up companies, generally in the computer industry.
The CFO served since February 2000. Prior to joining New Focus, he worked at Komag, Inc. For ten years he served as Komag's CFO and most recently held the position of executive vice president, CFO and secretary. One of the co-founder has served as the chief technical officer since July 1990 and as the acting vice president of engineering since November 1998.
The vice president and general manager was a former senior vice president of marketing and sales and a former vice president of marketing at Asante Technologies, Inc. Prior to joining New Focus, he was employed by IBM's Microelectronics Division and was involved in setting up and running an IBM subsidiary in China.
One of the co-founders has served as one of the directors since inception in April 1990. He has also served as the chairman of New Focus' board of directors since May 1996. Prior to that, he served as New Focus' president and CEO and continues to perform research and marketing activities for the company. He is currently a member of the board of directors for Euphonix, Inc., IRIDEX Corp. and Gadzoox Networks, Inc., as well as on the board of several private companies.
Another director has served as the president, CEO and director of Sizzle International, Inc., a restaurant operator and franchiser corporation. Prior to that he served as the president and CEO of La Salsa Holding Co., an operator of restaurants throughout the United States.
New Focus has a director who was a former president of LightWave Advisors, Inc., a venture capital and business development advisor to firms in optical communications, software and Internet companies. Prior to that he was a managing director and partner at C.E. Unterberg Towbin, an investment banking and venture capital firm, and its predecessor, Unterberg Harris.
Another director is an associate at U.S. Venture Partners, a venture capital firm.
Other directors include a partner in NorthEast Ventures, a venture capital firm, and a partner at Morgenthaler Venture Partners, another venture capital firm. New Focus' proposed ticker symbol is NUFO, and it is expected to price 5.0 million shares between $14.00-$16.00 during the week of May 8th.
For more information after the quiet period, contact New Focus, Inc., 2630 Walsh Ave., Santa Clara, CA 95051-0905, phone: 408-980-8088, fax: 408-980-8883, website: www.newfocus.com.
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