Wednesday, January 12, 2011

Optical Interconnection Players Strengthening Their Businesses

By Lisa Huff

Molex just purchased Luxtera’s AOC business completing the circle that all the other optical interconnect players started. During the telecom bust in the early 2000’s, Amphenol, FCI, Molex and Tyco Electronics all either de-emphasized their optical interconnect businesses or exited them all together. Now, they have all re-entered. Why?

While they are all working on more high-speed copper solutions like the one Tyco showed for 25G and beyond at SC10, I beleive they also see the writing on the wall. While they won’t admit it, I think they know that beyond 100G copper cable interconnects may have FINALLY reached the end of their useful life. At 40G and 100G, for example, there is still no twisted-pair solution and the direct-attach copper can only reach about 7m reliably.

It has been interesting watching the choices these traditional connector companies have made:
  • Amphenol: It never exited the optical interconnect business, but left the transceiver products to Avago, Finisar, JDSU and others until recently. It has a stronghold on the short-reach copper direct-attach market so has inroads at customers for its AOCs and modules.
  • FCI: Exited the optics business entirely for a few years but then started again from scratch and subsequently purchased MergeOptics in February 2010. MergeOptics is what was left of Infineon Technologies and still has strong technical abilities in short-reach products. It also has the building blocks to provide all-optical interconnects all the way from the chip (see my previous posts on MergeOptics). They can provide both AOCs and transceiver modules so have the ability to cover all high-speed markets in InfiniBand, Ethernet and Fibre Channel.
  • Molex: Purchased Luxtera’s AOC business recently. So while FCI and Tyco are stressing short-wavelength technologies, Molex has turned to custom long-wavelength ones. Luxtera’s technology is based on 1490nm devices, which really doesn’t matter if you’re purchasing an AOC, but will matter if you want transceiver modules. According to company representatives, they will eventually get back into supplying transceiver modules, but there has been no evidence of this as of yet. Perhaps the possession of Luxtera AOCs will prompt this.
  • Tyco Electronics: Tyco exited the transceiver business in the early 2000’s, but still had a very active fiber-optic interconnect business – especially for premise wiring (AMP NETCONNECT). It acquired Zarlink Semiconductor’s optical products group in May 2010. Zarlink is on the forefront of parallel-optics technology and was one of the first to introduce AOCs. It does not appear that Tyco intends to supply optical transceiver modules again.
I would never bet against copper re-inventing itself in order to meet the demands of future high-speed networks, but with optical 10G dominating the market currently and 40/100G optical products starting to emerge, it will be an uphill battle for copper solutions to gain traction. And beyond 100G, all bets are off. I’m thinking that these companies are reaching the same conclusions and that if they don’t add optical capabilities soon, they may render themselves obsolete within the next ten years or so. That's not to say that there won't be a vibrant businesses in both copper structured cabling and interconnects over the next ten years - there will be. But I think that R&D dollars will be better spent on optical interconnect technologies rather than trying to figure out how to run 25G signals using copper interconnects (including backplanes.) Or how to convince end-user customers in the US that a shielded structured cabling solution for 40G is better than a short-reach optical one because it will be cheaper - but at what cost to power, cooling and space?

What do you think? I'd love to hear your thoughts.

Friday, January 7, 2011

Old Data Centers Never Die

From ZDNet:

>>>Given the nature of JetBlue’s operations there, this datacenter facility had to be fully redundant on all levels, so there had been a considerable investment in the infrastructure of the facility to allow for 24/7 operations with high availability. But what do you do with this kind of facility when you no longer need it (which is not the same question as deciding if the facility has reached its end of life).

Enter Webair, a NY -based hosting provider that was looking to expand their operations. Today, less than 16 months after JetBlue made the decision to move out, Webair announced that they have opened up the facility as their new flagship datacenter  and executive headquarters, basing their Network Operations Center in the new (to them) facility which they have dubbed “NY1″.

Tuesday, January 4, 2011

Returns on Capital Expenditures vs. Capex Reductions

By David Gross

Just about every IT, networking, power, and cooling vendor serving this industry promises to both "reduce capex and opex".   But these goals are often meaningless, especially in the case of capital budgets, which often require board approval, and are set for the year.   Moreover, the number one objective of a capital investment is to get the highest possible return, as measured by IRR, not to spend less than you did during the last upgrade cycle. And in the case of opex, it's very easy, and very common, for salespeople to make spreadsheets showing big opex reductions that are not always achievable in practice, especially when most data centers are already very capital-intensive and highly automated.

Far more attention getting than droning on about opex, capex, ROI, and TCO like the herd, is to focus on more specific financial metrics that your product can improve upon.   IRR and NPV are good places to start.  Because most sales presentations confuse payback period with ROI, have no time value of money, and do a poor job showing tradeoffs, they have limited credibility.   IRR, which in my experience is known by some, but not all sales and marketing people, is the most important metric for any capital investment.    While it might take some education to explain what it represents to some buyers, if all the community college students taking introductory finance courses can learn it, I'm sure the CIO you're selling to can as well.

CoreSite Hires New CFO, Stock Falls 4.85%

By David Gross

CoreSite announced this morning that Jeff Finnin, Chief Accounting Officer at industrial real estate firm ProLogis, is taking over as CFO, replacing Deedee Beckman.   The stock took a hit today, and its aftermarket performance hasn't been great.  It could be perceived as a little strange for the company to be changing CFOs a couple months after the IPO.  That said, Finnin has a very similar to background to the woman he's replacing - they're both traditional accountants, not bankers or fund raisers - and Beckman also came to CoreSite from ProLogis.

Beckman will remain on the job another two weeks, with Finnin taking over on the 24th.   This seems to be a fairly cordial turnover, and the replacement's prior experience is remarkably similar to his predecessor's.  I find little reason here for investors to have had such a sharp reaction.

Monday, January 3, 2011

Data Center Stocks Drop 4.35% in the 4th Quarter

By David Gross

Data Center Stocks fell just over 4% in the 4th quarter, with our Services Index falling from 100.0 to 95.35.  However, it was all because of the Equinix warning in early October.    The index fell to 88.95 at the opening bell October 6th, and rose 7.53% for the rest of the quarter.

The REITs had a weak quarter, with DuPont Fabros, Digital Realty, and CoreSite all dropping between 15% and 17%.   Some of this is attributable to rising Treasury yields, which reduced the spread between risk-free government bonds, and data center REIT dividend yields.   30 year Treasury yields rose from 3.7% to 4.36% during the quarter, and when this happens, dividend investors often demand higher returns due to the added risk of a REIT over a Treasury Bond.   Interestingly, the leading apartment and office REITs did not take much of a hit during the quarter.  However, the big difference between those stocks and the data center REITs is that the data centers were raising rents during the recession, while the apartments and offices were not.   Now the apartment and office owners, including Avalon Bay and Boston Properties, are benefiting from expectations that their pricing power will improve.

Managed services and hybrid managed-colo providers had a good quarter, with Terremark advancing 25%, and leading all stocks in our index.   Rackspace and Savvis were also up over 20%.    Internap also had a strong quarter, rising 24%, while no one else with a CDN presence had a particularly good quarter.  Akamai and Limelight were down, and Level 3 bobbed up and down with all the Netflix news, but finished in the delisting zone at 98 cents a share. Services Index

Company Ticker Mkt Cap Dec 31 Close Oct 1 Open Quarterly Chg
Equinix EQIX $3,704,643,400 81.26 102.35 -20.61%
Digital Realty DLR $4,499,442,000 51.54 61.70 -16.47%
DuPont Fabros DFT $1,259,822,100 21.27 25.15 -15.43%
Rackspace RAX $3,925,307,700 31.41 25.98 20.90%
Savvis SVVS $1,409,724,800 25.52 21.08 21.06%
Level 3 LVLT $1,626,800,000 0.98 0.94 4.59%
Akamai AKAM $8,544,750,500 47.05 50.18 -6.24%
Navisite NAVI $139,792,800 3.71 3.34 11.08%
Terremark TMRK $850,944,500 12.95 10.34 25.24%
Limelight LLNW $571,471,600 5.81 5.89 -1.36%
AboveNet ABVT $1,471,438,200 58.46 52.09 12.23%
CoreSite COR $233,380,400 13.64 16.39 -16.78%
Internap INAP $315,612,800 6.08 4.90 24.08%

Index Value October 1
Index Value December 31