The Day Ahead: New Focus eyes strong IPO

The initial public offering of New Focus, an optical networking company, is expected to be so well-received that Renaissance Capital made it the "IPO pick of the week" -- a week early.

The optimism may be warranted. In a dead IPO market, New Focus has what it takes to generate a buzz.

The company, which will trade Thursday, is offering 5m shares expected to price between $14 to $16 (£9.34 to £10.68). CS First Boston is the lead underwriter.

New Focus makes telecommunications products used to build optical networks. The company's products include fibre amplifier products, wavelength management products, high-speed opto-electronics and tunable laser modules. In other words, components for optical networking.

Optical networking is complicated stuff, but all investors really need to know is that it's a hot market. Fledgling optical networking companies can sell for billions just for being in the right business at the right time. Telecommunications companies are upgrading to optical networks at a rapid clip. Research firm Ryan, Hankin & Kent estimates that the market for fiber optic components will top $22.5bn by 2003, up from $6.6bn in 1999.

New Focus has two potential paths -- it can either grow on its own, or be bought by a big telecommunications equipment maker such as Nortel, Lucent or Cisco. If recent history is any indicator, New Focus is an acquisition waiting to happen.

Last December, Nortel ponied up more than $3bn for pre-revenue optical networking company Qtera. The Qtera unit won a optical networking contract from Qwest Communications just last week. JDS Uniphase bought New Focus rival E-Tek Dynamics in a stock swap valued at $15bn in January.

But even if New Focus isn't bought, it can do well on its own. The company has a blue-chip client list that includes Agilent Technologies, Alcatel USA, Avanex, Corning, Corvis, JDS Uniphase, Lucent and Nortel. No customer accounts for more than 10 percent of revenue, the company said in regulatory filings.

The company, which has been around since 1990, also has a strong portfolio of intellectual property and patents. For the nine months ending Deceember 31, New Focus had sales of $18.1m and a net loss of $7.67m. The company's losses accelerated as the company expanded. For the three months ending March 31, the company reported sales of $9.7m and a loss of $12.5m.

New Focus' biggest challenge may be boosting manufacturing capacity. The company, which currently has 578 employees, said it will hire aggressively in the next couple quarters. Meanwhile, the company needs more space. New Focus has facilities in Santa Clara, California and Madison, Wisc. and is adding plants in San Jose, California, Middleton, Wisc. and Shenzhen, China. "We anticipate that we will require an additional 100,000 square feet in Northern California to facilitate our growth over the next twelve months," the company said.

Another challenge for the company is competition, which is a tangled web for New Focus. Many of the company's clients are also competitors. New Focus cites E-Tek, JDS Uniphase, Nortel and Lucent as competitors, and the latter three are also customers.

"We compete with these companies with respect to the development, marketing and sale of fiber optic components," the company said. "In some cases, we supply test equipment and photonics tools to competitors of our fiber optics components business."

Believe it or not, Zap.com is still around. As you may recall, Zapata, better known as a fish protein company, tried to buy Excite and build an Internet empire in 1998. As soon as Zapata had some partners lined up, it bailed on its plan.

In early 1999, Zap.com returned. On Monday, Zap.com reported a first quarter loss of $3.1m on no revenue. The company's biggest accomplishment was registering 20m shares to lure potential partners. Zap.com is building out its business and cooking up something called the ZapBox interface.

We've been waiting two years for this alleged portal player to build out its business. By the way, Zap.com trades these days over the counter under the ZPCM ticker.

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