Emcore's buys Intel's optical components

On 10th April Emcore said that it will buy the rest of Intel's Optical Platform Division (OPD) and its Connects Cable business for 3.7 million shares. At approximately US$7 (€4.43) per share, the deal is valued at slightly less than US$28 million (€17.72 million).

Products included in this acquisition are Ethernet and Fibre Channel based transceivers. The active cable is for high performance computing applications, an emerging area that - in Ovum's opinion - doesn't contribute to revenues today. Revenues from the transceiver products were valued at US$45 million (€28.5 million) in 2007.

This acquisition comes on the heels of Emcore acquiring Intel's telecom portion of OPD for US$85 million (€53.8 million) earlier this year. Emcore paid roughly 1x revenues for Intel's OPD: the total acquisition is valued at approximately US$113 million (€71.5 million) and the revenues at US$110 million (€69.6 million).

The acquisition puts Emcore in the top ten and right in the middle of the leading OC suppliers:

2007 rolling 4Q revenues of the top ten OC suppliers, with Emcore's revenues added to the total revenues of Intel's OCP business:

JDSU "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar; $492M
FNSR "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;..  $379M
SEI "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;.. $341M
OPXT "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;.. $276M
EMKR "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;.. $214M
AVNX "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;.. $213M
BKHM "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;. $203M
OPLK "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;..  $190M
MRVL "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;.. $165M
Fujitsu "&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar;"&brkbar; $153M

Source: Ovum RHK

The OC industry needs stable suppliers able to grow both their bottom and top lines. Emcore has stayed competitive in the industry, mainly because it is vertically integrated. It makes its own lasers, including VCSELs. It also makes APD and pin receivers. Emcore nominally sells transceivers into the storage, Ethernet, telecom (client side), and broadband access (CATV and FTTx) markets.  It has carved out a niche by successfully selling into challenging product areas like parallel optics and LX4-based transceivers.

Ovum RHK believes Emcore has positive margins in these areas. Emcore also has strong optics-based cable TV product offerings. It appears ready to take its business to the next stage. (One can argue that Emcore's arrival as a strong OC contender wouldn't have been possible without the Wall Street money made from investors' interest in photo-voltaic as an alternative energy source.)

The acquisition does provide investors with a stronger OC company and helps Emcore fill its factories creating a stronger vertically integrated company. When Emcore bought Intel's telecom business, it entered the high growth tunable transponder and tunable laser business. Although Emcore still has to purchase external modulators for 10 and 40Gbps, it has many captive components and should be able to operate at good margins.

The active optical cable business also has good growth potential. Emcore has experience in parallel optics and indeed its captive supply of lasers and receivers puts it in good stead to make a high margin product. The only concern Ovum RHK has is whether this business will be another niche or will proliferate into a big business. Standardisation among the different active optical cables is needed to boost volumes and help push down cost further, to make active cables a big business.

Emcore is also developing GPON and GE-PON products to serve the FTTx market. This will also be a high growth area for 2008 and beyond.

Daryl Inniss, VP and Practice Leader, Communications Components

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