DR. MUOI V. TRAN - OPTICAL COMMUNICATION PRODUCTS - (OCPI)
CEO Interview - published 01/15/01

DOCUMENT # LAN635

DR. MUOI V. TRAN is President and CEO of Optical Communication Products, Inc. Dr. Tran has over 26 years of experience in the field of fiber optics. He has been President and CEO of OCP since 1994, and was one of the co-Founders in 1991. His previous experience includes Director of RD&E, VP of RD&E and Systems Business Unit Manager at PCO, Inc. (PlessCor Optronics, Inc.) from 1984 to 1991. Prior to this he was a member of the Technical Staff at TRW ElectroOptic Research Center from 1981 to 1984 and a member of the Technical Staff at Bell Laboratories from 1978 to 1981. Dr. Tran has a PhD from the University of Western Australia.

Sector: Communications Equipment

TWST: Could we start out with a brief overview of Optical Communication Products?

Dr. Tran: Optical Communication Products, or OCP for short, is one of the major suppliers of optical subsystems and modules to the metropolitan equipment manufacturers. OCP started in 1991, so we’ve been around for nine years which is quite a while in the optical communications industry. Personally, I have been working in the field for 26 years since Fiber optics was still in the research Labs. We started OCP in 1991 with initial investment from Furukawa Electric Company, based in Japan. Back in the late 1980s and early 1990s, they were investing into a few companies in North America to expand their basic business base. Before OCP, they also invested in a company which was called JDS at that time and is now known as JDS Uniphase. So Furukawa was making investments into fiber-optic companies, and when we started our company, we teamed up with Furukawa for two reasons. Number one, obviously, was the financial investment. But number two was the fact that we needed a company that understood our business and which had a technology that we could leverage. Since the early years, we have supplied high-performance fiber-optic modules: initially receivers and LED links. Later on, we shifted our focus toward laser transmitters and receivers. Back in early 1997, we introduced a number of “industry first” products: OC3, OC12 transceivers that could operate over a very wide operating temperature range, the so-called Bellcore (or Telcordia) temperature range of -40 degrees C to 85 degrees C. Those requirements were and still are needed for fiber-optic equipment used into the metropolitan area networks. Back in 1997, the metro market wasn’t attracting a lot of attention from the optical component community that were mostly concentrating on the long haul market. We could see the potential in the metro market and focused on it in the early days. Since 1997 it has grown very fast and that has enabled our revenue to grow quite rapidly from $10.1 million for our fiscal year 1997 to $101.9 million for fiscal year 2000. Within the last year or so the metro market has become quite a hot item compared to a few years ago. Our business focus now is almost exclusively focused on the metropolitan area networks, and the high-speed premise networks Our customer base is very good. We supply all the major fiber-optic equipment suppliers, the likes of Alcatel, Cisco, Ciena, Lucent, Marconi, Nortel that are our major customers in North America. We also supply to ECI Telecom, which is one of our key customers in Tel Aviv, Israel.

TWST: Can you give us an idea of the size and growth potential of the markets you serve?

Dr. Tran: RHK’s estimate is very often quoted in the industry. They estimate that the total fiber-optic component market was about $6.6 billion in 1999, and will increase up to about $23 billion in 2003. That includes everything passive, active, all of the components. OCP focuses on optical transmitters, optical receivers and optical transponders for the metro and high-speed premise network part of that market. There is not yet a detailed market study for these components in the metro market, but I can tell you from the equipment viewpoint, RHK says that SONET equipment in the metro market will grow to $17 billion in 2003. That’s at the equipment level. The component level, obviously, is a percentage of that. But as far as the growth rate, RHK also says that the market for the metro transceiver and transponder products, which are the kinds of products we make, will grow at about 50% per year between now and 2003. That’s the kind of growth that we have seen in the market. We also believe that the metro market is migrating away from first generation components such as discrete lasers and PIN diodes toward the second and third generation integrated modules that we make. Of course, these figures are only estimates by RHK. Actual numbers may be different.

TWST: What are OCP’s competitive advantages?

Dr. Tran: It is our focus on our customers, our markets and our products, let me illustrate what I mean. OCP is very focused in the market that we serve, namely transmitters, receivers and transceivers for the metro and the high-speed premise networks. We offer our customers a very complete product line that provides the entire range of performance options that are required by this market. For example, we offer both low speed like OC3, OC12, and high speed like OC48. We also serve the shorter distance, for example, 2 kilometers, 15 kilometers, as well as the longer distances, 40 kilometers and 80 kilometers. We also provide, not only the normal 0-70 degree C temperature range, but also the extended Bellcore temperature range of -40 to 85 degrees C. So, if you take these three options, one is distance, one is speed, and one is temperature range, you have three axes. If you draw out those three axes in a three-dimensional space, OCP products fill the entire space. None of the other suppliers out there can fill these three dimensions of the matrix. So, as far as competition, we really don’t have a direct competitor that competes with us on all these options. Rather, we have a number of competitors that each provides products for different segments of this three-dimensional matrix. In addition to the ability to offer a complete solution to our customers, OCP competitive edge is also in the quality of our products. OCP modules are specifically designed to offer very high performance that exceeds all applicable industry standards over the entire operating temperature range. In particular, OCP module design takes special care of EMI (electromagnetic interference) radiation issues which make it easier for our customers’ equipment to pass the FCC emission standards. If you look at the metro market, it has its own set of unique requirements that differ from the high-performance, expensive long haul market and the low-performance, low-end LAN market. Some of our competition comes from a group of competitors that are very strongly in the LAN market. They are trying to move toward the performance required for the metro market. We have another group of competitors that are traditionally long haul suppliers, and they supply into the high end of the metro market, but their products are generally first generation and fairly expensive.

TWST: Where would you like to see OCP in three years?

Dr. Tran: OCP’s mission statement is to be the premier supplier of fiber-optic interface products for metropolitan area and high-speed premises networks. We have been growing significantly over the last few years and we plan to continue to grow the company, to maintain our position as a key player in this market. So, basically, our strategy right now is building up the company on our strong foundation so that we will continue our growth in the next few years.

TWST: What percentage increase in sales and earnings should investors expect from the company over the next several years?

Dr. Tran: We provided some guidance to our investors back in November 2000 during our conference call to announce our Financial Results for Fourth Quarter and Fiscal Year 2000. We told our investors at that time that the revenue growth for this year will be about 60%.

TWST: What major changes do you expect in your markets over the next several years?

Dr. Tran: Accelerating growth is likely. This market is currently growing fast and we predict that the rate of growth will accelerate. The driver for the growth is really because of the demand for bandwidth. As you well know, the use of the Internet is driving this. Users are just starting to move from 56Kbd modems to high-speed Internet connections like DSL and cable modems. This is putting a lot of burden on metropolitan networks to support this. Different people are talking different numbers, but some feel the bandwidth demand is growing by a factor of three every year, or a factor 10 every two years or so. So there is a demand for bandwidth out there that’s creating a bottleneck in the metro networks and that’s why this market is growing fast. The metro market demand is very strong now but we believe that this is only the tip of the iceberg. Our products allow our customers to deliver the bandwidth at the same time as reducing the cost. We believe that we have a significant lead in this market space and we plan to continue to be strong in the future.

TWST: What would you be looking for in general terms in acquisitions, mergers, joint ventures, partnerships and alliances?

Dr. Tran: As you know, we had an IPO back in November 2000 and one of the reasons for the IPO was to provide us a currency so that we can go out and be active in the M&A area. We will be looking to acquire some of the key technologies that will allow us to be the leading supplier in the metro market. Our first targets are companies that have the IC, active optical device and optical compact packaging technologies that we will need in our products over the next three or four years.

TWST: What benchmarks or milestones could investors use to judge the company’s progress over the next several years?

Dr. Tran: The investors normally look at revenue growth and earnings growth; these are probably the main two metrics that they are looking for. We obviously look at them as well. We want to continue to grow our company by having good revenue growth. We also pay very special attention to our earnings as well. We run a company that’s looking at both the top line and the bottom line very closely. So both of those metric values would be significant numbers to look at. I would also encourage investors to look at our products and customers and at the substantial long-term relationships that we have built up. These are often difficult to quantify but are good indicators of future potential. We think investors will find that we have all the ingredients for success in the future: strong revenue and earnings growth together with good products and customers in a dynamic market.

TWST: What are the risks or general concerns regarding the company? Is there anything about the company that keeps you awake at night?

Dr. Tran: In order for our company to be successful, we need to continue to execute the way that we have been doing. OCP has been around for nine years and our management team has many years of experience in this fiber-optic industry as well as a long history of working together. We have been running this company profitably since the beginning. We have had a very good revenue growth and earnings growth for the last nine years. So our team has a very good track record and we believe that we will continue to be successful in execution the same way that we’ve been doing for the last nine years to keep the company on the same path. What kind of risks could prevent us from doing that? In order for us to continue to do well, we need to do three things. First of all, we need to continue to develop and introduce new products as the market and technology progress. We need to offer our customers the proper solutions in a timely manner so that they can reduce their time to market. That’s what we’ve been doing and we need to continue to do that. Secondly, we need to supply to our customers the volume quantity that they need for their product demand. Thus, we need to ensure that our internal manufacturing capacity and quality are in place to support our customers’ needs. Finally, we need to make sure that all our material supply chains are also in place to support our demand. We have, like I said at the beginning, built a very strong foundation for the company, we are now adding a lot more infrastructure and so on to execute these items.

TWST: How do you think your R&D expenditures will change in the future, in terms of both amount and emphasis?

Dr. Tran: Going forward, we intend to invest quite heavily in our R&D area. In the past, if you look at it as a percentage, the number is low, but going forward we intend to increase it quite significantly. In our last earnings call we provided guidance that our R&D expense by the end of our current fiscal year, which ends in September 2001, will be in the range of 6%-7% or so versus last year which we just finished at about 2.5%. So we do intend to increase quite significantly. Also looking for the long run, we want to bring in-house some of the technology that we need. We would do that by expanding our internal R&D as well as acquiring some of these technologies, as I mentioned earlier.

TWST: What are the primary factors affecting your margins?

Dr. Tran: Number one is the material cost. Number two is our labor cost. Those are the two key factors. We work all the time to keep our gross margin respectable. As you well know, as the volume increases, and the technology matures, the price does erode. As the price is reduced, if your costs remain the same, obviously, your gross margin is going to be reduced. Over the years we have been quite successful in maintaining our GM at a fairly good level, even as the price of the product is reduced over time. We have achieved this by aggressive cost reductions as well as by introducing innovative new products with higher margins. Our GM in the past has been in the range of the mid-40s or so, 45% to 46%. We have some quarters with higher GMs in the 50s, but generally speaking we would estimate that our GM target would be in the mid-40%.

TWST: How do you feel about your current stock price?

Dr. Tran: As far as the stock market is concerned, I think there are a lot of other factors that affect the overall market and OCP stock price which don’t relate to how OCP as a company is doing. That is something that I look at, but it’s not something that I can influence by worrying about. I focus my attention on running the company the way it should be run so that we can achieve or exceed the metrics that we have set. In the long run, you know, the good results will speak for themselves and will be reflected in the stock price.

TWST: What two or three reasons would you give long-term investors to buy stock in OCP today?

Dr. Tran: The investor has to draw their own conclusion, but if I have to give them some reason why, I would say, the market demand is very strong, we have good products, we are already well established, we have a very good presence in this market. Let me outline these in more detail. Number one is the market that we play in, the metropolitan and high-speed premise market is growing very fast and the demand is substantial today. We are very active in this market and we are a very well recognized supplier. Number two we have very good record of innovative products. Look at what we’ve introduced in the last few years, for example, and that result will speak for itself in terms of what we want to continue to do in the future. Number three is for us to be successful — we have to execute well. Why do I tell an investor that we execute well? We’ve been running the company for nine years and we have a good track record in terms of both the revenue growth as well as the earnings.

TWST: What are your plans for geographic expansion?

Dr. Tran: The majority percentage of our sales right now, about 80% or so, are in the North American market. We also have a strong presence in Israel. We have started to expand into the European market. To do this we recently established an office in England. We have onboard a Managing Director of European Operations, he joined us in about the June time frame, and his job is to set up our European operation. As far as the Far East, we haven’t focused much on the Far East because we want to establish ourselves in Europe first before we go to the Far East.

TWST: Is there anything I’ve overlooked or missed that you would like to bring up?

Dr. Tran: I would like to mention on another advantage that we have which is often overlooked. We work very closely with our customers to understand their requirements so that we can supply them the right products which enable them to go to market with their equipment very quickly. Over the past few years, we have developed good relationships with our customers. We also pride ourselves in our service to the customer. We are 110% focused on our customers, providing them with the very best service that is possible. Another thing that we haven’t touched on yet is our product roadmap, or product introduction plan. We want to provide our customers with a one-stop-shop for optical transceivers and transponders for the metropolitan area networks and the high-speed premise networks. In our product roadmap, we have a number of new products including optical transponders, 10 gigabit-per-second products, DWDM and CWDM products and so on to serve the above market need. Finally, I would like to add that my statements in this interview may contain forward-looking statements that involve risks and uncertainties. Important factors which could cause actual results to differ materially from those expressed or implied in the forward-looking statements include those detailed under “Risk Factors” and elsewhere in filings with the Securities and Exchange Commission made from time to time by OCP, including its Registration Statement on Form S-1 declared effective on November 2, 2000 and its periodic filings on Forms 10-K, 10-Q and 8-K. OCP undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof.

TWST: Thank you. (RF)

DR. MUOI V. TRAN
 President & CEO
 Optical Communication Products, Inc.
 20961 Knapp Street
 Chatsworth, CA 91311
 (818) 701-0164
 (818) 701-1468 - FAX

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