JDSU (JDSU) announced that they are acquiring Picolight, a maker of VCSEL based optical transceivers. This is yet another example of healthy consolidation in the optical components business, which ultimately will lead to a better business environment for all- except for the customers like Cisco that exploit the oversupply situation. And Cisco is the likely reason JDSU bought Picolight in the first place.
JDSU paid $115m in stock for Picolight, roughly 2.5x to 3x Revenue. While not a huge amount of money, it is a respectable sum when compared to public valuations of other small optical component companies like Stratos (STLW) Avanex (AVNX), or Bookham (BKHM)..
Picolight is interesting because they are the last pure-play provider of VCSEL based modules, using technology developed in house. The reality is they are a laser supplier that was forced to package their products up in order to extract maximum value. Particularly interesting are their long wavelength (1310nm) VCSELs. Finisar (FNSR) is a major VCSEL supplier, and aside from acquiring 1310nm VCSEL technology from Genoa and Infineon, has yet to commercialize it.
Low cost, low power 1310nm lasers are suddenly are a lot more valuable with the advent of the 10G-LRM standard for transmitting 10GbE. LRM that can extract much more value from 1310nm lasers by using crafty EDC (Electronic Dispersion Compensation… but let’s call it crafty for the benefit of most readers) electronics to take 1310nm wavelengths and transmit them further over existing fiber. It is a crucial technology for reducing the cost of optics in 10GbE deployments. Vitesse (VTSS.PK) is a key EDC chip supplier into SFP= based EDC designs.
Picolight, like any good VCSEL supplier, will make the argument that VCSELs are inherently cheaper to manufacture than the DFB or FP lasers used in the majority of 1310nm applications today. JDSU, in purchasing Picolight, is betting their VCSELs will enable a cheaper LRM solution. VCSELs also have low power characteristics that make their use ideal for small form factor SFP+ applications.
What does not make sense is that JDSU has previously dismissed the optical components business and chosen to focus on subsystems and test equipment. But JDSU would not have acquired Picolight unless they were focused on fielding a competitive 10G LRM module. This indicates that JDSU senses an opportunity in the market that didn’t exist a year ago. They are in essence, admitting a mistake through their actions.
The fact that a company that publicly dismissed the optical module market and has now reversed that stance is very notable. Today, JDSU is very much not engaged with Cisco, the largest module customer, for next generation 10GbE modules. Perhaps the Picolight purchase is an admission that this situation must be reversed, and a bet that long wavelength VCSELs are the means to make it happen. JDSU just needs to convince Cisco that the technology is ready for prime time.
Author is long Finisar and Vitesse and short Cisco as a hedge.