A good deal for Emcore and optical components

Daryl Inniss, VP and Practice Leader Communication Components

On 10 April 2008, Emcore announced it had entered into a definitive agreement to acquire the rest of Intel's Optical Platform Division (OPD) and its Connects Cable business. The acquisition strengthens Emcore's top-line, making it the fifth largest optical components (OC) supplier, and promises to improve Emcore's bottom line as it expands its enterprise customer base. The market will also benefit from the arrival of a stronger supplier.

Emcore announced that it will purchase the rest of Intel's OPD and its Connects Cable business for 3.7 million shares. At approximately $7 per share, the deal is valued at slightly less than $28 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 $45 million in 2007.

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

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

Acquisition good for Emcore and OC

The OC industry needs stable suppliers that can 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 vertical cavity light emitting lasers. It also makes APD and pin receivers. Emcore nominally sells transceivers into the storage, Ethernet, telecoms (client side) and broadband access (cable-TV and FTTx) markets. It has carved out a niche by successfully selling into challenging product areas like parallel optics and LX4-based transceivers. Emcore has been successful at growing positive margins in these areas. Emcore also has strong optics-based cable-TV product offerings. Emcore 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 photovoltaic as an alternative energy source.)

The acquisition does provide investors with a stronger OC company. The acquisition helps Emcore fill its factories and thus create a stronger vertically integrated company. When Emcore purchased Intel's telecoms 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 grow 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 we have is whether this business will be another niche or will proliferate into a big business. Standardization among the different active optical cables is needed to grow volumes and help further push down cost, which can serve to truly make active cables a big business.

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

Daryl Inniss is Vice President and Practice Leader of Communication Components. Daryl has over 15 years of experience in the optoelectronics industry.