AFTER THE BOOM
Diversification Keeps Newport Afloat; Company Still Buying
By ANDREW SIMONS
Robert “Bob” Deuster came to Irvine-based Newport Corp. seven years ago bent on outgrowing the company’s sleepy industrial measurement business. Now he’s happy to have it.
“We’re not a pure play,” Deuster said. “It helps to be diversified at a time like this.”
Two years ago, the maker of automated assembly and test gear watched as its fiber-optics unit,which Deuster built up during his first year on the job,grew by about 60% annually, faster than its semiconductor products and old-line measurement, or metrology, business.
Wall Street doted over the company, boosting its shares some 1,000% to their 2000 peak.
The dream ended abruptly last year. Where Newport’s sales nearly doubled in 2000, they grew 12% to $319 million in 2001 as telecommunications gear makers stopped buying Newport’s products. The company’s shares are off 65% from their highs at the start of last year.
But thanks to Newport’s metrology business,once again its largest by sales, Newport has stayed afloat as other fiber-optic players have withered. In 2001, sales from Newport’s semiconductor gear and metrology businesses each grew 25%.
Newport makes equipment that automates production of fiber-optic networking devices and chips. It also makes measurement and inspection products for the automotive, computer and medical technology markets.
The company has sought growth by consumption,a signature strategy of Deuster. Together with Newport’s financial chief, Charles Cargile, the soft-spoken Deuster has closed eight deals since 1996.
The three most recent came in the past 12 months, marking one of the fiercest buying binges in the company’s history.
The most recent of the deals,last month’s buy of North Billerica, Mass.-based Micro Robotics Systems Inc.,took less than three weeks to finish.
Deuster, a former General Electric Co. engineer, said he’s gotten pretty good at striking deals.
“It’s hard to hoodwink me,” he said.
The acquisitions are designed to help immerse Newport in robotics, which help cut chip and fiber-optic production costs. Deuster, pronounced “doyster,” has been moving the company into robotics for the past couple of years.
Newport won’t stop there, he said. With $289 million in cash, 32-year-old Newport is ready to make more buys this year as company valuations are low.
Along with robotics, Newport officials have their eyes on optics and software.
“There’s quite a bit out there,” Deuster said.
Newport stands to change in the next few years. Though Deuster said it has been beneficial to sell to several markets,especially in a tough economy,it has occurred to him that Newport might want to spin off some divisions.
“When fiber optics was growing really fast, I thought that it could be spun off into its own division,” Deuster said.
For now, Deuster said he isn’t looking at spinning off any companies but doesn’t rule it out later. If there comes a time when the fiber-optic division is burdened by being part of a larger company, Deuster said he could see pushing it out of the nest.
“It could be something we would consider,” he said.
Still, Deuster stresses the different parts of Newport have few borders inside the company. They depend on each other, he said, making spinoffs more difficult.
“They cross-supply each other,” Deuster said
Newport has seen its share of pain. The telecom and chip downturn forced Newport’s hand twice last year. The company shed about 400 people in two rounds of layoffs. Newport also meshed facilities in Garden Grove, San Luis Obispo and Longmont, Colo., into an expanded Irvine operation, saying it would increase efficiency.
Newport also is shedding dead-end businesses. A couple of years ago, Deuster and his team thought Newport’s production muscle would be able to turn a profit if it had a side business packaging chips and other products on a contract basis.
“We thought it would be a good idea, but it hasn’t turned out like we had hoped,” Deuster said.
The company is in the process of exiting the contract business.
“We’re very aggressively streamlining right now,” Deuster said.
Deuster and company hope that move and others will give Newport time to focus on larger customers, which Newport hasn’t really had many of yet.
Three-quarters of Newport’s customers range from startup to midsize businesses, with the remainder coming from big names such as Nortel Networks Inc. and Corning Inc.
“We’d like to be more involved with those customers,” Deuster said.
Analysts still don’t expect much,at least in the near term. For the next two quarters, analysts expect Newport to post slight losses. A lot is riding on a comeback of telecom gear and chipmakers, they say.
“We do expect a meaningful recovery in Newport’s fiber-optic segment, which has been the principal driver of the stock’s value in our view,” said Robertson Stephens Inc. analyst Sue Billat in a report. “Although the fourth quarter benefited from a surge in industrial and defense segments, we believe that the uptick is partially due to seasonality.”
Newport officials said they see at least somewhat of a recovery coming. While Newport officials expect first-quarter sales to be as much as 10% below the December quarter, the second half should come out strong, according to Deuster.
“We’ll start growing again, but that growth will be paced,” he said.
Deuster points to Newport’s order activity as evidence of a fledgling rebound. According to Deuster, the “order capture rate” stabilized in the fourth quarter and came in flat compared to the September quarter. The number of customers canceling orders declined to a “significantly lower amount” in the December quarter, he said.
“This supports our belief that during the second half of 2001 we reached the bottom of the cycle for the fiber-optic and semiconductor equipment markets,” Deuster said. “We are increasingly optimistic.”
