Finance & Investment Club Telecommunications and Media Sector Fall 2012 Fiber optic components Senior Analyst: Paul Camomilli Junior Analysts: Daniel Currie, Christopher Von Keitz, Michael Whitney, Andrew Goodwin, Alex Ushak, Kris Pahuja, Christyne McGarvey, Timothy Wicaksono, and Arjun Kapoor

2 Industry Definition Companies in this industry manufacture fiber optical components and modules. These products are used to manipulate light sent and received through a fiber optic cable. In order to communicate data across a fiber cable, both a transmitter and a receiver are needed at each end. The transmitter converts data from an electrical signal to light, and the receiver interprets the light back into a digital signal. This industry makes and assembles the parts, such as lasers and photo detectors, into these components. An optical network can contain a variety of components and modules, which can manipulate the light in many ways. These components and modules are sold to OEMs, such as Cisco and Alcatel-Lucent, who add them into their products for sale directly to telecoms, such as AT&T and Verizon, and to data communication providers, such as Google, Amazon and ISPs. Fiber Optic Components and Modules Manufacturing Sub-Sector

3 Industry Outlook Outlook: Positive Increased Spending from the Telecom Market Increased Spending from the Datacom Market Continuing Industry Consolidation *Total Optical Component Spending figures are from LightCounting industry report excerpt.

4 Industry Breakdown Technology $100,387.2(100%) Telecommunications* $ (9.20%) Communications Equipment Manufacturing $4,122.4 (4.11%) Fiber Optic Component and Module Manufacturing ** $11.36 (<.01%) Industry Breakdown by Market Size (billions): *Domestic and Foreign Telecom($832 BN), Diversified Communication Services($52 BN), Communication Equipment($3969 BN), Networking Devices($133.3 BN), Bus Software/Services($4249 BN). **Data compiled from Bloomberg Total Market Share by Revenue:

5 Revenue Generation Fiber Optical Components and Modules Manufacturers Communications Equipment Manufacturers Consumers Telecom Providers Consumers and Businesses Supplies Optical Packages/Base Materials Datacom Providers High Rivalry High Power Moderate Power High Barriers to Entry No Threat of Substitutes

6 Revenue break down: By Market Segment *All Data from Company 10Ks **Other category includes other business segments such as industrial laser applications, medical uses, and more

7 Domestic Foreign Revenue break down: Geographically *All Data from Company 10Ks

8 Increased spending from telecoms 72.48% CAGR 7.59% CAGR  Spending Expected to Increase Overall: – Global Telecom Spending (which includes ISPs) is expected to keep increasing at a CAGR of 7.59% – Spending for the Top 3 US Telecoms, which represents 70% of the domestic industry’s total spending, are expected to to increase 8.4% for 2013  Increasing Wireless Rollouts of 4G LTE Services – Telecoms are expanding their Wireless 4G LTE networks, which are faster than traditional 3G HSPA and EVDO networks – Global Telecom 4G LTE spending is expected to increase at a CAGR of 72.48%, peaking at $35.4 billion in 2015 – The telecoms are providing the initial supply of infrastructure needed for the demand to rise *PWC Industry Report: “We need to talk about Capex – Benchmarking best practice in telecom capital allocation.”

9 Increased spending from telecoms  Mobile device ownership continues to increase – From 2011 to 2016, the CAGR for new users will be: Smartphones: 24% Portable gaming consoles: 56% Tablets: 50% Laptops: 17%  Rising use of mobile devices will increase the demand for bandwidth: – The continued uptake of mobile devices by consumers will make the global mobile internet traffic CAGR of 78%. – Increasing bandwidth demand due to mobile video, with an expected CAGR of 90% between 2011 and 2016 – Streaming video to make up 75% of all mobile data used by 2016 In response to the increasing use, carriers will be forced to upgrade their networks’ capacity. 78% CAGR *Cisco Visual Networking Index: Global Mobile Data Traffic Forcast Update,

10 Increased Spending in the Datacom Market  Modernization of telecom networks will keep spending high: – Telecoms are combining both their data communications and telecommunications together under the same network protocols – This is being done to improve service and to reduce costs – Spending on data services is increasing at a CAGR of 20.8%  The convergence of the Datacom and Telecom Markets will fuel optical components spending: – Faster technologies, such as 40G/100G, will be needed to help the carriers upgrade the capacity of their existing networks – The 40G/100G market is expected to grow at a CAGR of 32.6% from 2011 to 2015 due to adoption by both the telecoms and the datacom providers, such as data centers *Oclaro Investor Report for 2012

11 Acquisition on July 2012 of: Continued Consolidation  Companies are consolidating for growth and greater selling power: Companies in this industry are undergoing a variety of mergers and acquisitions to both horizontally and vertically integrate. Companies are trying to become one- stop shops for their customers and differentiate themselves based on: Price Technology Positioning with customers  OEMs are slowly vertically integrating for niche products: Cisco acquired another private components and modules manufacturer, Lightwire, on February of 2012 Merger on April 2009 Created: *Cisco Acquired Companies Report for 2012

12 Risks & Opportunities Primary risks affecting the industry : Primary Opportunities affecting the industry: Continuing Industry Consolidation Companies in this industry are undergoing a variety of mergers and acquisitions to both horizontally and vertically integrate. Shareholders of smaller companies may benefit from possible buy outs. Risk of Foreign Exchange: Companies set prices for products in USD for sale to all customers throughout the world. Costs and expenses are incurred in multiple foreign currencies due to worldwide manufacturing. Intellectual Property Protection: Companies’ futures are heavily dependent upon their research efforts, which may deal with disputed patented technology. Macroeconomic Conditions: This industry is fueled by capital expenditures. Economic uncertainty lowers the amount of investment telecoms and datacoms are willing to put into their networks. Greater than expected decrease in average selling prices: An extremely competitive market combined with commodity-like products can experience unforeseen lower average selling prices. Limited Suppliers: Companies frequently rely on one or two suppliers for many of their key products. Disruption of supply chains could have a devastating effect on revenues.

13 Conclusion Fiber Optic Components and Modules Manufacturing Sub-Sector Outlook: Positive Increased Spending from the Telecom Market Increased Spending from the Datacom Market Continuing Industry Consolidation