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StockTalk
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TMF Interview With Uniphase Corp. Chairman and CEO Kevin Kalkhoven
May 7, 1999
With Brian Graney (TMF Panic)
Based in San Jose, California, Uniphase Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UNPH)") else Response.Write("(Nasdaq: UNPH)") end if %> is an optoelectronics company that designs, develops, manufactures, and markets fiber optic components and modules and laser subsystems. Its products are used primarily in the telecommunications market to enhance bandwidth along broadband communications networks. We talked with chairman and CEO Kevin Kalkhoven about his company, its products, and the role fiber optics play in the race for more bandwidth.
TMF: Perhaps you can start off by telling us about Uniphase and the optoelectronics market.
Kalkhoven: Our business is really the next generation of technology. We are used to the concept of electronics using the electron as the basic means of system power. It turns out in many instances the electron is too slow and the only way to get any speed or capacity is to go to the particle of light or the photon, which unless Einstein's wrong, there's nothing faster. So we have an unfair advantage.
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The more bandwidth you give people, the more things they can find to do with it, and the more the demand grows.
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Fiber optics is the methodology of using the photon in the telecommunications world or the bandwidth world. As a company, we started actually about 20 years ago in the laser business in a garage actually here in Silicon Valley -- one of those classic garage stories. We never had the venture capital. We just built the company making lasers for many years.
About the turn of the decade back in '92, we saw some opportunities as we believed that the fiber optic technology was going to reach a point of high demand. So, as a company, we took our experience with lasers and entered in '95 the world of telecommunications by acquiring some technology from a company called United Technologies <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UTX)") else Response.Write("(NYSE: UTX)") end if %>. This was technology for high-speed modulation or coding of the light to a light signal. We then moved on in fact and developed that technology, acquired some more technology from IBM <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: IBM)") else Response.Write("(NYSE: IBM)") end if %> and from Phillips <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PHG)") else Response.Write("(NYSE: PHG)") end if %>. Now [we have] built a quarter-of-a-billion-dollar company in the last four years just oriented toward, fundamentally, people such as the users of The Motley Fool -- people who want to use the Internet and don't want to have to stand for the World Wide Wait.
Our technology is based around increasing bandwidth by putting more and more streams of light down a single fiber. It used to be that when you put a fiber into the ground it would carry a single stream of light, about 2.5 gigabits a second. We have been working over the last few years to develop technology that allows people to put multiple streams of light [down that fiber]. In fact you can now put 80 streams of light down that same single fiber and instead of running it as, say, a single stream of light, you can have 80 times the amount of data passing through that same fiber.
And we've also increased modulation speed. Simply, it's like a modem -- the faster the modem, the more data you get. Modulation speeds have now gone from 2.5 gigabits per second to 10 gigabits per second. So naturally, in the course of five years, Uniphase has been a prime mover in increasing the capability and bandwidth in a single strand of fiber from 2.5 gigabits per second up to 800 gigabits per second. We look forward and see the way our technology can be used to actually increased to over a terabit a second, and all in one single strand of fiber. So we can make bandwidth very obtainable and hopefully very cheap to anyone wanting to use it.
TMF: You just reported your Q3 results. What aspect of that quarter stood out the most in your mind?
Kalkhoven: Well, in the last calendar year, we'd spent a lot of time and money in building the manufacturing facilities and developing new products for this market. We had forecast that there would be a strong demand for them in this calendar year. The delightful thing is, in fact, that did happen. Telecommunications revenue grew by over 100% year on year and 26% sequentially and we see that kind of growth rate in the telecom field continuing. So the first thing was that it was nice to find out that our forecasts actually were right.
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Nobody expects a computer to run in 100 years, but our products have to be designed to.
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The second is we are amazed by the continuing demand for bandwidth. It seems that it's like MIPS (millions of instructions per second) in computers -- the more bandwidth you give people, the more things they can find to do with it, and the more the demand grows. So we see a very strong continuing transformation from a computer-centric world to a bandwidth-centric world.
Then specifically, relating to the numbers, we were very pleased to see the top line growth and the fact that it was pretty much spread around most of our products. And with that the consequential gross margin and bottom line. We reported a very strong bottom line.
TMF: Some of your customers also happen to be your competitors in some of the other product markets that you also serve. As a business manager, how do you cope with that kind of situation?
Kalkhoven: Well, fortunately I've got enough gray hair or no hair on my head to have been part of the Silicon revolution back in the '70s when, if you'll remember, at that time all of the computer manufacturers were vertically integrated -- they did everything, hardware and software. But with the advent of merchant technology from people like Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> we saw a move away from, first of all, vertical integrations. Secondly, we saw the rise of a large number of new startups -- Dell <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: DELL)") else Response.Write("(Nasdaq: DELL)") end if %> and Compaq <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: CPQ)") else Response.Write("(NYSE: CPQ)") end if %> being good examples -- based around this merchant technology.
Our job as a company is to follow that same sort of parallel. We simply have to make our product better and cheaper than the internal source so people will naturally want to come to us rather than have to build new fabs and get heavy investments in technology. Rather, they should concentrate on building systems.
So it's our belief that what will happen is the same parallel as the computer industry because many of the same things apply and it's very difficult to remain vertically integrated. The capital costs of this technology are going up very considerably in terms of the fabs and so is the basis of the R&D so that if you have to spread the cost just among your own internal consumption, the unit cost becomes too high. That's the theory anyway. We'll wait and see, but certainly the trend is moving in that direction.
TMF: Speaking of your products, what other kinds of new products can we expect from Uniphase and what other business areas are we going to see Uniphase moving into down the road?
Kalkhoven: Well, our specialty is still communications and bandwidth. We do bandwidth and that is what we want to concentrate on. It turns out that, again, the parallel with the computer industry is very strong. If you think about the evolution of the computer industry, each new generation of technology offered significantly more price performance -- in terms of MIPS for instance -- per dollar of expenditure.
In our business we increase bandwidth fundamentally by increasing the power of our lasers for the same goal or value. More laser power and more lasers gives you more bandwidth. So our whole product strategy going forward is to try to emulate what happened in the silicon business and simply allow users to have more powerful lasers and more of them, which in turn gives them more bandwidth for the same price.
TMF: Over the past year or so, we've really seen acceleration in the consolidation of the telecom and datacom industry -- they were separate, now it's hard to tell the difference between one and the other. How does Uniphase fit into that general trend?
Kalkhoven: Well, again, we are the basic technology underlying it all. We do light, we do bandwidth. And whether that light is used by telecom vendors on long-distance submarine communications or on a campus on a fiber optic ring for data, it doesn't matter to us. We simply provide the source of the light. We provide the method of applying and transmitting the light through the network. So, both datacom and telecom are market places for us.
TMF: What do you think is the most commonly misunderstood element of your business, either from an investing perspective or from a business analysis perspective?
Kalkhoven: I think there are two things -- that's a hell of a good question, actually. You could probably tell me better. I think the first thing people don't quite get is the breadth of technology that we have to do and how reliable we have to make everything. It turns out a laser in telecommunications is much smaller than a microprocessor, it's about the size of a grain of salt. If it was sugar cubed in size, it would generate about 20 megawatts of power, or as much as a nuclear power station, and it's going to run without breakdown for 100 years.
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It turns out there is only one way in which we can provide the bandwidth requirements... both now and in the future -- and that's over fiber optics.
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So they're certainly complex devices and we've got to do a broad range of them. So people first try to compare us directly with silicon. [They ask] "Why can't you make more chips? Why aren't your yields higher?" Of course, it's actually a different set of materials with a different criteria. Nobody expects a computer to run in 100 years, but our products have to be designed to. So that's one.
The other [thing] is that people are confused about the speed of which the business is growing and the long-term growth behind it. It turns out there is only one way in which we can provide the bandwidth requirements ... both now and in the future -- and that's over fiber optics. Wireless can't do it. Conventional electronics can't do it. It can only be done by light. So there's a kind of a confusion about, let's say, how you can provide bandwidth. But in the final analysis, the only way it can be provided, [considering] the price that's required, is through fiber optics.
TMF: What company -- competitor, partner, or otherwise -- do you respect most in the general data-voice field?
Kalkhoven: Well, it turns out that just about all of the equipment companies are our customers, so I respect them all. I tell you, I know where my bread is buttered. But I think that there is a small community of scientists who, again, parallel some of the work that was done back in silicon and microprocessors in the '70s who are pretty much consecrated in Uniphase and also spread around a surprising number of other companies in the business. There are a few of them, there are probably in the 200 or 300 top scientists in the whole business, and they form the nucleus of the bandwidth revolutions. So I continue to be impressed by the small number of people making huge advances.
TMF: What do you think Uniphase will look like five years from now, if you can project that far?
Kalkhoven: I think we will simply be providing more of what we are doing today, which is more bandwidth for users of the Internet. My goal is that we should be able to provide the technology to allow bandwidth for anyone to communicate with anyone on the Web using video speeds at any moment in time and at costs that are significantly less than they are today. But from a technology viewpoint, we can do that. So I believe what we will have is a bigger company providing more technology cheaper to allow the bandwidth revolution.
TMF: Well, I'd like to thank you again, Mr. Kalkhoven. I've really learned a lot. You definitely have a fascinating company.
Kalkhoven: Thank you very much.
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