Finisar Automates Optical Networks

, the world's largest supplier of optical components for the telecom industry, has seen its stock more than triple this year following surging demand for its programmable switching equipment. Finisar has the best performing stock this year of any Silicon Valley company with a market capitalization over $1 billion. Finisar is the top holding of my

portfolio, which has outperformed the S&P by 26 per cent annually. Strong sales of

and reconfigurable optical add/drop multiplexers (ROADMs) have fueled Finisar's recent growth. Tier one telcos worldwide, especially in North America, have made the deployment of ROADMs central to plans to upgrade their optical networks. ROADMs contain costs by allowing the use of mesh networks with links between many cities. This allows one circuit to provide protection for two or more routes, which reduces the amount of fiber needed to provide a reliable network. Verizon Communications

has undertaken the largest ROADM deployment to date when it began rolling out

. The FIOS project is a major push by Verizon to provide a fiber connection to residential homes across the country, the first major U.S. carrier to do so. "The ROADM cycle is what's driving all the growth in JDSU Uniphase's

and Finisar's optical component business," said Auriga analyst Chandan Sarkar. "The use of ROADMs by Verizon to reduce bandwidth management costs related to their FIOS deployment made them realize how cost effective they are. Now Verizon is using them everywhere. A similar learning curve followed at AT&T

," he said. JDSU, one of Verizon's FIOS partners, is the top maker of ROADM gear. The newest ROADMs use wavelength selective switches. There has been a shift away from JDSU to Finisar as WSSs have becoming

. Finisar and JDSU are at the forefront of a

created by the explosion in wireless communications and video downloads. "There was explosive growth in shipments of WSS components in the first half of 2010, with the market 95 percent higher than the same period last year," according to Andrew Schmitt, an analyst with telecom market research firm Infonetics Research. According to Infonetics, ROADM sales are the fastest growing segment of the optical equipment market, and the WSS is the key component fueling that growth. The WSS is the chief optical component that has software embedded to automate the management of traffic in fiber networks.

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