Once a Sleepy Instruments Maker,
Newport Corp. Rides Fiber-Optic Boom
As technology stocks claw their way to a recovery from spring’s burst valuation bubble, one of the county’s oldest tech companies, Newport Corp., already has regained lost ground,and then some.
After toiling for more than three decades as an obscure maker of scientific testing gear, Newport is riding a wave of investor enthusiasm for the white-hot fiber-optics market, also known as photonics.
The company’s shares are sailing around 82, more than double their April price of around 32 and more than 10 times their 5 trading price at this time last year.
“The decision in the early days was ‘Can we make some money in this business?’ ” said the 50-year-old Robert Deuster, Newport’s chief executive, referring to the company’s move into fiber-optics. “The answer, of course, was yes. But we had no idea the market was going to accelerate at this rate.”
Few did. When Deuster first created a unit geared toward fiber optics during his first year in charge in 1996, others in the company considered it a gamble and questioned the $5 million investment.
It took more than two years for the unit to make a profit. But it has unquestionably become the company’s most promising endeavor. After nearly a decade of seeing its shares hover in the 5 range, Newport is beginning to attract national attention.
This year, the fiber-optics division is expected to generate 37% percent of the company’s $158 million in annual sales and Newport is upping the ante every month.
As its traditional meteorology, research and aerospace businesses flatten or shrink, fiber-optics sales are snowballing, rising 52% to $21 million in 1998 and 63% to $34.3 million last year.
Great Expectations
Analysts see an incandescent future, as well. According to Zacks Investment Research Inc., those who follow Newport expect per-share earnings to hit 47 cents this quarter and 67 cents the next, up from about 12 cents in its two most recent quarters.
Newport makes equipment that helps automate the production of fiber-optic equipment, a process now done largely by hand. The traditional methods work tolerably for low-volume production, but fiber-optic demand is rising, and manufacturers need to boost output. That, Newport officials believe, creates a big opportunity for companies like theirs.
Fiber optics enable computers to send massive amounts of data over hair-thin glass wiring that transmits light pulses rather than electrical signals. Thanks to the Internet and the proliferation of computer networking, the sector has become the most visible exception to this year’s tech sell-off.
Fiber optics has been used widely for at least 25 years ,long-distance provider Sprint Corp. touted the technology in its first commercials as far back as 1984. But fiber optics recently have caught investors’ imagination as telecommunications firms clamor to meet customers’ thirst for higher-speed connections and a wider variety of services.
Renewed Interest
Two developments are renewing interest. The first is a broader deployment by telephone companies, which have begun installing fiber-optic connections from neighborhood switching offices to individual homes,a stretch known as the last mile,rather than reserving the technology for long-distance corridors.
Just a few years ago, this would have been costly overkill. Today, the advent of high-speed Internet services, interactive television and the like are making such connections virtually mandatory.
The second factor is multiplexing, a technique of sending different colors of light through the same delicate strands of glass, greatly increasing the amount of information that can pass through,up to 2.5 gigabits of data per second.
The result is massive bandwidth and, propitiously for Newport and companies like it, equipment upgrades on both ends of the connection.
Though some fear investors are creating yet another bubble by moving their money from dot-coms to fiber optics, Deuster voices confidence that the bandwidth constraints will fuel upgrades for at least the next 10 years.
Deuster, a self-described “big-picture” manager who gives his team wide leeway, came to the company with an engineering background. But he had almost no familiarity with the fiber-optics industry.
That ignorance, he said, allowed him to consider applying Newport’s expertise to new markets rather than trying to grow the company along its existing lines. He enlisted a group of about 30 engineers, many of them with backgrounds outside the scientific equipment business, to find new markets for Newport’s alignment technology,which had been used for years by research customers who make microscopically precise alignments and measurements.
“You don’t sell technology for technology’s sake,” he said. “There has to be a value equation for the customer there, so if you can somehow connect the dots between the customer and what your products can do for them, you may have a successful business. If not, you should re-evaluate what you’re spending shareholder resources on.”
While Deuster said a clinical view is essential when evaluating corporate direction, he added that once he commits to a strategic plan, he’s passionate about seeing it through.
He’ll need that fervor as would-be contenders see a vacuum of opportunity. The landscape is littered with small companies with names like Coherent Inc., Electro Scientific Industries Inc. and GSI Lumonics Inc. that automate laser and optical equipment,though none, apparently, focus exactly on Newport’s niche.
Competition on the Horizon
But well-known semiconductor equipment makers with years of experience in the automation business could enter the market easily, as some have hinted they will do.
Deuster says Newport’s biggest competition could be its own customers,powerhouses such as Lucent Technologies Inc. and Nortel Networks Corp.,who may develop automation techniques of their own.
Still, Deuster says, there’s plenty of room. Newport automates only one step in customers’ manufacturing processes, and that market has a 15% to 20% penetration so far, Deuster estimates.
He hopes to create equipment that speeds up other stages in the manufacturing cycle, upping demand and opening up a far broader spectrum of customers. And though overseas sales already make up a third of overall revenue, he plans to expand Newport’s efforts abroad.
The company has made six acquisitions in the past five years, including the Garden Grove-based commercial optics operation of Corning OCA Corp. in October. If the stock price holds up, Deuster says, he’ll consider another, upping the ante on his fiber-optic bet by seeking funding for more aggressive expansion.
“Is that sustainable? Well see,” he said “I try not to worry about that,I have a business to run.”
