Faster is better. That's why fiber-optic networks, brimming with rivers of email messages and Web pages, are looking for ways to squeeze out more bandwidth. Companies such as


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are working on a number of products to pack more light waves into each optical fiber.

The result is a backlog of orders for the optical components built by



, its merger partner

JDS Fitel








. Their arcane pump lasers, filters and amplifiers are the scarcest technology in the communications business.

"We're ramping manufacturing as hard as we can, but at the same time demand continues to grow," says Kevin Kalkhoven, CEO of Uniphase, a leading builder of several components based in San Jose, Calif. "That's our biggest challenge right now," echoes Donald Scifres, CEO of SDL, a maker of pump lasers based in San Jose, Calif.

Both Uniphase and SDL have more than doubled their unit output in the last year.

The stocks are breathing some rarefied air on Wall Street. Uniphase shares cracked 100 Thursday, then settled to 99 7/8 at Friday's close. Uniphase has gained roughly 200% since October and increased by more than 10 times since 1995. Its merger partner, JDS Fitel, has quadrupled since October on the Toronto exchange. SDL has more than quintupled since October and added 2 1/16 to end at 65 3/4 Friday.

Analyst Raj Srikanth with

First Albany

predicts that sales of optical components will jump from $1.8 billion in 1998 to $3.5 billion by 2000. Some component suppliers have seen their shares hop by as much as 1,000% in the past three years. The stocks' popularity seems unlikely to ease before the demand for components does.

Uniphase trades at 100 times last year's profits, excluding merger and acquisition charges. SDL is trading at 75 times operating earnings, while the recent IPO highflier E-Tek is trading at 98 times earnings. What helps is that Uniphase is expected to grow profits 40% in coming years and E-Tek 28%.


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, which is valued at 78 times operating profits, is expected to grow earnings 30% a year.

Research director Charles McCurdy with

Veredus Asset Management

, four-year owner of Uniphase, isn't selling yet. His firm snapped up a little E-Tek to diversify. "I think that there's enough demand right now to keep everybody's plate full."

The challenge is to expand facilities without disrupting production. "It's akin to building a new airport, while at the same time keeping the old airport functioning," says Bill Diamond, marketing vice president with E-Tek, a peer of Uniphase that also is based in San Jose.

It's the right problem to have. Component companies are feeding a ravenous market demand that would make even Cisco envious. To maintain its 40% sales growth in 2000 and beyond, Cisco must convince telephone carriers to replace their voice switches with Internet systems. For now at least, Uniphase's growth rate depends simply on how fast it can expand its facilities.

That's not easy. The optical chips use four different elements -- not just silicon -- and the testing process can last six months or more. The technical expertise of these companies, which involves cramming more and more functions onto chips, is bringing out some interesting comparisons.



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with the Pentium chip, Uniphase will increase its power and its reliability," says Phil Lamoreaux with money manager Lamoreaux Partners, which has owned Uniphase since its IPO in 1993.

"Moore's Law is being broken in the optical world," Lamoreaux says. "We are more than doubling capacity every 18 months." Intel's co-founder Gordon Moore predicted that the number of transistors that could be crammed onto a microchip would double at a regular interval -- roughly 18 months.

Lamoreaux should know. As an analyst with

American Express

, he put venture-capital funding into Intel in 1970. Intel began to dominate the microprocessor market and was able to increase its price relative to chip performance for years. Similarly, Lamoreaux predicts, Uniphase will be able to charge a premium for its optical amplifiers and other components.

But not yet. Last year, a price war amongst customers such as Ciena and Lucent created a ripple effect. Including an accounting charge for disposal of assets, Uniphase gross margins declined to 47% from 49% a year earlier. E-Tek gross margins, on the other hand, slipped to 51% in the December quarter from 56% one year earlier.

One latecomer to the game stumbled.



, an optical components company based in Alhambra, Calif., came up against stiff competition from Uniphase in selling its pump lasers, which go into certain amplifiers. Ortel ditched the products in November, deciding that further R&D wasn't worth the cost. The stock has sagged from 20 last summer to 7 1/2 Friday as sales of its other products slowed as well.

The next generation of optical technology will kick up demand for components further.

Sycamore Networks

, a promising startup based in Chelmsford, Mass., is starved for its optical switch components. "One of the things we bet on was that we would be able to get whatever components we wanted," says founder Daniel Smith.

Most of the current venture-capital investment is guided to optical networking startups like Sycamore Networks that are customers of E-Tek and Uniphase. Hardly any entrepreneurs are trying to break into the fiber components business. Lucent only makes some of its own components, but these are for its own consumption.

Consolidation among the top players is already on the way. This spring, Uniphase, the acquisitive leader in this field, will complete its merger with Ontario-based JDS Fitel. Srikanth with First Albany says E-Tek, SDL and others might have to follow suit in coming years.

"It comes down to us three or five companies," says E-Tek's Diamond.