Lumentis has won contracts with a number of companies both within Sweden and worldwide. The company is presently seeking to build a presence as a market-leading system vendor in the European market, in tandem with breaking into the U.S. market.

The first eighteen months or so, to mid-2002, were devoted to establishing the company, including creating the right team, developing the products and gaining the first customer. This time scale was contrasted with that of equipment vendors in the past:

"Even comparing this cycle with that of a company such as Cisco Systems there is a marked contrast - Cisco spent several years getting to the stage of launching its first commercial system. Today, the expectation is that an equipment developer should be ready to launch a product within months or even weeks. At Lumentis we are very happy with what has been achieved in the first two years."

Two funding rounds have been completed since the launch in September 2000, raising a total of $29 million, both noted by Mr. Lundberg to have been "very straightforward". Investors Deutsche Bank Industrial Holdings AG and Santec Corporation are not of a 'typical' background for a high-tech start-up company, though Santec is also an optical components supplier to Lumentis.

Commenting on the second funding round, in April 2002, Mr. Lundberg said that Santec invested a "substantial" part of the $19 million raised.

Lumentis currently holds cash reserves of $29 million, which is anticipated to be sufficient to sustain the company for two years at current cash-burn rates. Mr. Lundberg noted that the company is realising revenues, which are not included in this figure:

"The balance sheet is healthy and we have no significant debt. It is conceivable that break-even point could be reached before cash reserves are exhausted".

The research and development budget was acknowledged to be very high over the first two years of operations, during which period the sole focus was product design and development; this expenditure will now be significantly reduced. Ongoing expenditure towards maintaining product competitiveness and developing new functionality is projected to settle at between $3 million and $4 million annually, representing approximately half the level of the initial R&D budget.

Lumentis has a team of nineteen research and development staff, comprising the major segment of the company's forty-four employees.

Mr. Lundberg said the past year has been spent creating a showcase of reference customers - the aim being to demonstrate a range of network applications for the company's systems, from mobile and metro carriers, to enterprise and high-end storage customers. The message that Lumentis wishes to promote relates to the flexibility and cost-effectiveness of its products.

Lumentis owns all the technology underpinning its products, and has so far filed five patents, one of which has been approved to date. Mr Lundberg noted that patent applications have been lodged in Europe and the U.S. as well as in Sweden.

Commenting on development of the technology, Mr. Lundberg said that a solution was reached "partly through an inventive turn of mind and partly through luck":

"When designing the system it was decided that ports should also be able to deliver functionality deriving from placing the data channels on top of the wavelengths. To achieve this, a new way of manipulating the wavelengths on a fibre was developed. A side effect of the technique was that signal loss is dramatically reduced, even when using standard components."

Eliminating amplifiers

After alighting on a technique that substantially reduced loss in optical systems, Lumentis found that amplifiers could be discarded from the products designed for metro and regional markets. This feat had previously been achieved only in the laboratory, with signal loss in live networks having defeated attempts in the past to leave out the amplifiers.

The elimination of amplifiers greatly simplifies a number of aspects relating to product design and deployment, but the highest virtue is that of reducing costs. Lumentis is keen to promote the advantages of amplifier-free systems to potential customers. According to Mr. Lundberg, carriers are 'tired' of the necessity to constantly tune and re-tune amplifiers in optical networks when implementing any changes to the network. Further benefits include the relative ease of adding wavelengths to a fibre and elimination of reliability issues associated with amplifiers.

Performance and flexibility

The leveraging of standard components is felt by Lumentis to be a key product differentiator, resulting in significant benefits for customers in terms of price/performance. Lumentis believes it is able to derive higher performance than its competitors from the same components. The technology enabling this increase in performance lies at the heart of the product and is inherent to its functionality. Although Santec is a major source of components used by Lumentis, other suppliers are also used.

Discussing the company's innovations, Mr. Lundberg drew a comparison with evolutionary biology in which the phenomenon of exaptation has been identified. In this concept, a physiological characteristic that initially brings an advantage on one front, later results in an unrelated evolutionary leap. An example of this process is believed to be feathers on early flightless birds, which originally provided insulation and allowed birds to inhabit colder climates. Over time, feathers evolved to the point where they enabled flight.

The Lumentis system architecture allows a high degree of flexibility, in terms of both scale and service provision. Mr. Lundberg explained that the system platform is technology-agnostic. The technology is defined at the level of the plug-in units, enabling the provision of a mixture of different services on the same platform at the same time and support of different technologies over the same fibre pair.

Illustrating this feature, Mr. Lundberg said that, on single platform, an operator could install the recently launched plug-in unit for CWDM, and later add a DWDM plug-in beside it - the technologies will run side-by-side over the same fibre. This facility is covered by one of the patents filed by Lumentis.

For the operator, this system flexibility holds a number of advantages, a key factor being the ability to adopt a technology without committing to it long-term. For example, CWDM could be selected as the most appropriate technology today, without the need to worry about demands on network capacity then necessitating a switch to DWDM technology tomorrow. It was noted that no other system vendor currently offers this plug-in CWDM capability.

Mr. Lundberg added that the operator is therefore liberated from taking difficult and potentially costly decisions relating to technology and the best price-performance option for the current circumstances can be selected. It was noted that this level of flexibility is made possible through the elimination of amplifiers from the system.

Dynamic networking

Lumentis' dynamic networking capability, deriving from the optical cross-connect (OXC) unit, was developed based on the fact that, in general, between 25% and 30% of the capacity on a network has to be shifted. Taking this factor into account, Lumentis situates all components associated with the OXC unit away from the main line signal, on the 'tributary' side of the system, where wavelengths are shifted for re-routing. This design retains a clear signal path on the line, obviating the need for amplification that would otherwise be necessary due to resulting signal loss.

Mr Lundberg pointed out that wavelengths shifted to the tributary side of the system are no longer 'colours', but pure optical paths. This design is claimed to deliver to the customer a scalable, and highly cost-effective, dynamic networking solution. The customer pays only for the level of flexibility required and does not have to opt for a high-capacity, 'all or nothing' solution.

To date Lumentis has utilised OMM's MEMS-based technology in its OXC system. Commenting on the loss of this technology with the closure of OMM, Mr. Lundberg stated that Lumentis is developing a replacement, expected to be available within approximately three months. The company is designing a board-compatible solution that is also likely to incorporate MEMS technology.

"We have not seen any great demand for the cross-connect functionality to date, and for this reason we project that sufficient stocks of MEMS components are held to satisfy demand for some time to come - probably to the end of 2003, by which time we will have developed a replacement."

Specifically, Mr. Lundberg said that Lumentis has witnessed no demand for full cross-connect capability in the prime medium-haul (300 km to 400 km), forty-wavelength systems sector. This trend is believed to be a market-wide phenomenon, rather than specific to Lumentis.

The case of Movaz Networks was cited, a company offering a complete high performance cross-connect system, but who is not known to have deployed any units, although it has installed the add-drop element. It was noted that a 'typical' deployment currently entails add-drop functionality without full cross-connect capability - a situation felt to be due to the high cost of cross-connect systems, resulting in operators only investing if the functionality is deemed essential to their present operations.

Reliability

Regarding the reliability of optical networks, Mr. Lundberg noted that the most common causes for outages, excluding human error, are failures of fibre and amplifiers. An amplifier in a network represents a single point of failure, as all wavelengths will be passing through it. With only passive optical components on the fibre, the Lumentis un-amplified equipment negates a prime reliability issue.

The Lumentis systems are claimed to be inherently simpler than most rival equipment, and thus easier to manage, upgrade and provision. There is no requirement for activities such as signal balancing, a factor that is important for enterprise customers in particular. Mr. Lundberg noted that enterprise customers would not generally have any knowledge of optical networking - simply wanting to know that the system will work.

Scalability

Lumentis sees its systems as merging two classes of product, based primarily on the degree of scalability - Mr. Lundberg likened this to purchasing a small car that can be later expanded into a truck. A key element of this scalability is that a customer can invest in a base system at low cost, without the necessity to plan for expansion, or pay upfront for the option.

A carrier could start out initially with a system delivering a few wavelengths at very low cost, and could then gradually scale the network to forty wavelengths carried over 100 km, without the need for amplification.

Traditionally optical network architecture demands that amplification be designed into the system from the start; there is generally no option for adding amplifiers at a later date if they become necessary. The presence of amplifiers adds significantly to costs and can prove prohibitive for some customers. Therefore, a system providing similar capacity and scalability at a substantially lower cost is likely to prove extremely attractive, especially in the current market climate.

Describing the current market in Europe, Mr. Lundberg noted that the top players are Nortel Networks and ADVA Optical Networking, with Nortel holding very much a dominant position. This situation is not expected to change in the medium-term. Relative to Lumentis, both the current market leaders possess advantages of scale and longevity:

"ADVA has been addressing the European metro network space for around eight years now, and has an established presence, aided by its success in tapping into the industry boom - although this does not in any way detract from the admirable job that ADVA has done in building a major presence in a highly competitive market. It has also succeeded in developing an extensive portfolio of OEM agreements."

With its focus on the metro market space, ADVA is regarded as a tough competitor, and one that has proved adept at identifying trends in the market and adapting its strategy as appropriate. Mr. Lundberg pointed out that this company has also resisted the temptation to allow technology to take over as its guiding light, an eventuality that can lead companies to develop features purely because they are technologically possible. This 'trap', Lumentis is taking care to avoid.

Nortel Networks is considered to be a strong company possessing some 'interesting' technology concepts, mainly arising from what Mr. Lundberg termed the 'old days'. He added that while the company should be counted 'lucky' to hold some key technologies (Lumentis itself fortuitously arrived at an important technological advance), it also suffers from a patchy range of SONET/SDH switching product lines. Overall, Nortel is seen to offer a broad and competitive product portfolio, a possible weakness being pricing for metro network systems. Mr. Lundberg remarked that Nortel is probably deriving a majority of revenues from existing customers at present, and may struggle to gain new customers.

Mr. Lundberg is confident that Lumentis will be able to make rapid progress in building market share, as a result of responses from both the industry at large and signed-up customers. When submitting RFQs and RFPs to potential customers, Lumentis is finding that it is able to offer higher performance at a lower cost than the competition, including both Nortel and ADVA: "Often, competitors are offering systems that are simply too expensive or too bulky in comparison with Lumentis'' products".

This ability bodes well in terms of both winning business and facilitating the development of OEM partnerships. Mr. Lundberg noted that discussions with resellers in this market reveal that "at least some" are failing to sell present offerings and, as such, are seen as potential resellers for Lumentis systems.

Mr. Lundberg remarked that currently a carrier requiring such capability would typically invest in an over-engineered and expensive long-haul system, offering a range in the order of 600 km, due to the lack of a 'medium-haul' alternative. It was further noted that the need for long-haul systems is very limited in most geographic markets - including the European countries - with the U.S. representing a notable exception.

With regard to market sectors and their definitions, Mr. Lundberg feels that the terminology does not always keep pace with either available systems or the needs of customers. From the Lumentis perspective, the long-haul market space is catered for with systems reaching up to 300 km. Although, as Mr. Lundberg conceded, long-haul is usually taken to denote a range closer to 600 km, and the term 'medium-haul' may more accurately describe such system capabilities.

It was pointed out that with Lumentis' equipment, signal dispersion imposes a limit of approximately 300 km, even after the addition of amplifiers. The lack of true long-haul capability is not felt to be a missed opportunity for Lumentis, and Mr. Lundberg stated that the company, to date, has had no intention of addressing this market.

Because Lumentis claims an ability to deliver a migration path that is technology independent, its flexible solutions are suitable for a range of market sectors, stretching from the enterprise space through mobile operators to metro and regional carriers.

Storage market

Lumentis is now addressing the storage market, and is developing a new concept for ESCON multiplexing capability that is expected to be available soon. The company has already released dual Fibre Channel and dual Gigabit Ethernet for both DWDM and CWDM, and ESCON is the last piece to put in place for the SAN market. When this capability is commercially available, the legacy storage market will then be addressable.

Mr. Lundberg commented that Lumentis is able to achieve product development extremely rapidly, to the extent that the company believes it is bringing a new dimension to the process - units including transponders and plug-ins have been developed and launched within a very short time frame.

Enterprise market

Lumentis also addresses the high-end enterprise market, serving either a company's internal requirements or those of an ISP. Mr. Lundberg commented that a recent contract win with an enterprise customer in Scandinavia entailed installation of a network serving ten cities in Sweden and Denmark, adding that the absence of amplifiers in the solution greatly simplified provisioning.

While Lumentis will inevitably encounter Cisco Systems in targeting the enterprise market, Mr. Lundberg said Lumentis aims to largely circumvent any obstruction through offering Layer 1 solutions as alternatives to Cisco Systems' Layer 2 products. It was stated that, although practically unbeatable in the Layer 2 space, Cisco Systems is presently unable to compete on price against Lumentis for Layer 1 solutions, where it labours under pricing disparities of between four and eight-fold.

Applications

Commenting on applications for Lumentis systems, Mr. Lundberg said regional networks have been deployed, where several spans each stretch to between 150 km and 175 km:

"In this situation we are basically turbo-charging the metro platform to produce a hybrid metro-long-haul solution."

When provisioning a basic 'starter' DWDM system, Lumentis claims it is able to deliver savings in the order of sixty percent over competitive offerings, while realising a sustainable profit margin. And as already noted, from this base system, the customer can grow the system as and when capacity demands dictate.

A further application cited by Mr. Lundberg is that of an existing customer operating an SDH network with add-drop and STM-16 functionality supplied by Lumentis, who could then opt to add say CWDM and DWDM wavelengths in parallel. The bottom line is that service providers can evolve their technology to expand the range of services offered to customers, without writing-off their original investment.

This facility is viewed to be of particular value to mobile network operators. As an example, Mr. Lundberg described how a 2G network with circuit-switched STM-1 functionality could be migrated to 3G packet ATM streams over STM-1 and, in the future, to 3G over Gigabit Ethernet.

Partnerships

Outside of Europe, objectives in the global market are as yet less defined. The key to these markets for Lumentis is seen to be through partnering agreements, employing a strategy similar to that adopted by ADVA.

Lumentis is now focusing efforts on the signing of agreements with distributors and systems integrators. Four distributors have been signed up so far, with two more nearing completion and a further two in the initial stages. It is anticipated that by the end of 2003 Lumentis will have agreements with a total of ten distributors.

A crucial factor in forming effective partnerships, Mr. Lundberg noted, is the development of relationships that extend to working with the third-party company, rather than simply signing a contract for distribution, which ultimately delivers no value for either party. A prime factor driving Lumentis' position as a supplier to third-party vendors is the pricing of its products. Mr. Lundberg stated there are cases where Lumentis has been able to supply a customer solution for around half the cost of rival systems offered through a local distributor.

Commenting on Lumentis' relationship with Santec, outside that of funding, Mr. Lundberg said there is an established partnership for the development of components, and their optimisation for integration into systems. He added that when designing components there is a set of parameters to be worked with - the crucial decision lies in selecting those parameters that are most important for applications in networking equipment.

As well as being a component supplier to Lumentis, Santec acts as distributor in the Japanese market. Santec has built up a position in the global optical components business over a period of nearly twenty-five years. Currently, the agreement with Santec in Japan is exclusive, but Mr. Lundberg said the arrangement is time-limited and will expire soon. The expectation is that it will be renewed on a non-exclusive basis.

For Santec the deal is felt to be valuable as it expands the company's addressable market within Japan and through the relationship, Lumentis gains opportunities for further partnering agreements. From a company culture perspective, Santec is regarded as taking a very long-term view in its thinking, thus providing a strong and dependable ally for Lumentis.

On the company's approach to the U.S. market, Mr. Lundberg said the plan is to establish a long-term partnership with an established player in the market, particularly one with access to the RBOC sector. Tellabs was cited as the type of company Lumentis would consider, bearing in mind that it is fundamentally a sound company, and in this case holds a substantial presence in Denmark. Mr. Lundberg noted that Lumentis does not compete directly with Tellabs, a company mainly addressing the high-end market.

Customers

While Lumentis is comfortable with the number of customers gained over the past year, it believes the prime factor mitigating against greater success is the state of the market, rather than any failing on the part of the company: "instead of customers coming knocking on our door, the banks have been knocking on customers' doors, asking where their money is!"

The company sees one positive aspect of this situation as an opportunity to ease into the market and establish a presence at a measured pace - to "test the waters"'. It was noted that such a luxury would not have been available two years ago. When the market does pick up, Lumentis aims to be an established name in the industry and from there intends to build a secure position.

Mr. Lundberg commented that Lumentis does not have the resources or the organisation in place at present to properly handle a large number of customers. It was noted that carrier customers in particular are currently focusing attention on product reliability and support services, as well as the credibility of the supplier.

Lumentis currently lists four customers within Sweden, plus an additional four worldwide - one each in the U.S., Latin America, Australia and Scandinavia. Mr. Lundberg commented that many of these contract wins have not yet been announced. He noted that a key benefit deriving from the U.S. contract win was the necessity to comply with NEBS (Network Equipment Building System) certification, a prerequisite in recruiting distributors in the country.

Summing up the company's present position, Mr. Lundberg stated that Lumentis is confident with its product portfolio, as attested by the proportion of first-time customers placing additional orders - two examples being OM and Hi3G (Hutchinson). Further bolstering this view is the level of positive feedback received concerning product quality and functionality, plus the competence and commitment of installation and support personnel.