The era of dial-up modems is long gone. Fast fiber optics rule
the day, with telecoms, broadband-cable operators, equipment
manufacturers and chipmakers racing to provide greater speed and
bandwidth to an ever more demanding consumer.
Applied Optoelectronics (
), a fiber optic networking products maker based in Sugar Land,
Texas, is looking well positioned to help lead the way amid all
It serves three markets: broadband cable, fiber to the home
(FTTH) and data centers. The company went public last September,
but it's been in business since 1997.
Applied Optoelectronics stock has risen from an
of 10 to trade near 23. It is up 54% this year and 31% from an
early-May dip as the company reported first-quarter earnings per
share of 6 cents, just meeting analyst estimates. Revenue in the
quarter rose 74% from a year earlier to $24.9 million, ahead of
analyst views for $23.9 million.
The company started out making fiber-optic devices such as
laser diodes. These elements turn electrical signals into optical
signals and then back into electrical signals.
Over the years, the company added more complicated modules and
systems based on this technology. It also grew to become a
vertically integrated manufacturer, a differentiating factor in
Cable Industry Capability
The company's legacy traces back to making lasers that are
extremely weather-resistant, an ideal quality for the cable TV
and FTTH industries, with their significant amount of outdoor
infrastructure. Over the years, Applied Optoelectronics has grown
to be the largest maker of fiber-optic devices for the cable TV
"Applied Optoelectronics' technological basis is in molecular
beam epitaxy (MBE), which is different from virtually all other
laser makers that utilize metal-organic chemical vapor
deposition," wrote Craig-Hallum Capital Group analyst Richard
Shannon in a report. It generally provides better reliability
over temperature and humidity changes, he says.
Applied Optoelectronics holds 57 patents related to MBE
manufacturing. It has only two direct competitors in the
) and to a lesser extent,Finisar (
), he noted.
This segment accounted for about half of Applied
Optoelectronics' total revenue last year. Shannon expects this
business to grow at about 3% this year and 20% next year, as
cable TV companies enter a new upgrade cycle. Customers in this
segment includeCisco Systems (
) andArris Group (
The biggest growth is expected to come from Applied
Optoelectronics' two other businesses. Shannon forecasts its FTTH
and data-center revenue to jump 394% and 203% this year,
FTTH -- as described by the Fiber to the Home Council -- is a
relatively new way of bringing vastly higher bandwidth to
consumers and businesses, thereby enabling more robust video,
Internet and voice services.
Gigabit Home Internet
Technically, the industry group notes, it means delivering a
communications signal by optical fiber from the operator's
switching equipment all the way to a home or business, replacing
existing copper infrastructure such as telephone wires and
Two examples of U.S. FTTH services areAT&T 's (T) uVerse
offering andVerizon Communications ' (VZ) FIOS service, notes
Applied Optoelectronics, which makes both optical transmission
and reception equipment for the FTTH industry.
"In particular, we're addressing very high-speed, advanced,
gigabit-class fiber-optic home-network deployment," said Stefan
Murry, Applied Optoelectronics' chief strategy officer.
"Earlier generations of fiber to the home had given us 50 to
100 megabits per second, but there are customers out there now
that are interested in deploying gigabit-per-second type
services," he said. "And for that to be done economically, we
really need some new technology, and it requires fundamental
innovations at the optical-device level."
In this segment, there are two types of customers, he noted.
First, companies such as AT&T and Verizon buy their equipment
primarily from other suppliers, such asAlcatel-Lucent (ALU)
andEricsson (ERIC) . In the FTTH industry, Applied
Optoelectronics supplies modules to the latter type of firm.
The second type of customer in the segment is a company
innovating at the device level and making specialized equipment
to address its particular needs in the FTTH space, Murry says. In
this case, there is no "middleman," and Applied Optoelectronics
is the direct supplier to this type of company.
A 'Google Fiber' Future?
Google (GOOGL) is an example of the latter type. Applied
Optoelectronics hasn't officially said if it is working with the
much-ballyhooed Google Fiber fast-broadband buildout, but the
analyst and investor communities have speculated that it is.
The most important growth driver on a percentage basis is the
FTTH segment, "which is really code for Google Fiber," Shannon
said. "That one, the percentage growth rate will be huge, coming
from a small base. That may end up to be the largest business in
2015 or 2016, if what we think happens actually does."
The important element in this development is that Applied
Optoelectronics continues to own the technology it has developed
in partnership with Google, Shannon wrote.
Google Fiber fast-broadband service started around Kansas
City, Kansas. The project has now expanded into Provo, Utah, and
Austin, Texas. And Google has also been in discussions with
dozens of cities in nine more U.S. metro areas about bringing in
Shannon has modeled that the potential annual sales from an
Applied Optoelectronics buildout of new infrastructure for Google
Fiber could reach between $70 million and $100 million in two to
Big In Data Centers
Applied Optoelectronics' third business segment is data
centers. Here, too, strong growth is expected -- especially as
cloud computing becomes more prominent. The company is well
positioned in this area, with two of the world's four largest
data-center operators as customers:Microsoft (MSFT) andAmazon
"You have fiber optics in the data center to transmit data
from one network element to another, for example from a server to
a switch or from a switch to another switch," said Murry. "Up
until a few years ago, data rates in this application were
relatively slow, at 1 gigabit per second or lower."
At those data rates, you can transmit using regular copper
cable, he says. In the last couple of years, interconnection
speed among the switches and servers in data centers has gone up.
At the same time, the physical size of the data centers has
expanded. So not only is there longer distance, but data rates
have sped up from 1 gigabit to as much as 40 gigabits per
"As a result, you can no longer transmit a signal over
sufficient distance now at those higher speeds to cover one end
of the data center to the other using copper cable," said Murry.
"So now they have to go to fiber-optic cable."
Being a vertically integrated company helps Applied
Optoelectronics work smart and quickly in its varied business
A typical research-and-development process would involve three
steps that need to be followed in sequence: making a new laser
diode, then subassembling the optical module and finally
integrating it within a larger system.
"That's a very lengthy process," said Murry. "By having all of
these parts of the business under our own roof, we can do
parallel work ... so that by the time the device is ready,
everything else is ready as well."
Applied Optoelectronics has manufacturing facilities in Texas,
China and Taiwan. It expects to spend $16 million to $18 million
across its Taiwan and Houston facilities this year to expand
fabrication capacity, mainly to address demand in the data-center
and FTTH markets.
Where a complex technological process is involved, there are
always risks. If Google Fiber has major slowdowns or can't deploy
a nationwide network, it could significantly impact Applied
Optoelectronics' stock price, says Shannon. Much of a surge that
the stock had in February and March is attributable to Google
Fiber expectations, he says.
Updates in data-center industry standards could also affect
the business. A lot of data-center customization is required now
as standards lag needs, Shannon says. If standards catch up, it
could reduce the need for customization.
The timing of the cable operator upgrade cycle is another
But of Applied Optoelectronics, he says, "we think it's not
only the highest-growth optical company out there, it's probably
one of the highest-growth hardware-technology companies available
anywhere in the U.S. market today."