Test-Taking Takes Off in Fiber Optics

Innovation is a great thing, as most people would agree. But there are attendant issues, such as testing and measuring, that must be addressed in order to turn innovation into a viable business. The same is true in the fiber-optic networking business.

Clearwater, Fla.-based Digital Lightwave Inc. [Nasdaq: DIGL] has focused on network testing and measurement since it was founded in 1991. It's in a growing market. With more and more traffic running over fiber-optic network cable that employs complex optical technologies, the need for equipment to test these networks is growing.

"The market for fiber-optic transmission testing products and systems is estimated to be $900 million," says Greg Mesniaeff, an analyst at Robinson-Humphrey in Atlanta, a subsidiary of Salomon Smith Barney Holdings Inc. in New York. It's projected to grow by more than 25% per year through 2004 to approximately $3 billion, according to a report by Mesniaeff.

Digital Lightwave's sales might confirm this trend. For the second quarter of this year, the company reported sales of $22.1 million - more than double last year's $10.7 million. The sales were higher than a published estimate of $19.8 million from Robert W. Baird & Co. in Milwaukee and PaineWebber Inc. [NYSE:PWJ] in New York.

Earnings of 20 cents per share were up from break-even last year and were considerably higher than the consensus Wall Street estimate of 14 cents.

This growth in the overall market for optical networking test equipment isn't confined to the U.S, which is Digital Lightwave's current market. Last month, the company announced that it was establishing a distribution partnership with Conformance Standards Ltd. in Herefordshire, England.

Sales aren't the only thing investors have been watching. The stock has responded to a management change involving Digital Lightwave's founder, Bryan Zwan, who resigned as director Aug. 22. The current CEO, Gerry Chastelet, seems to have the investment community behind him, according to analyst Arnold Lee at C. E. Unterberg, Towbin in San Francisco.

Digital Lightwave's stock price has moved in line with those of competitors such as Chelmsford, Mass.-based Sycamore Networks Inc. [Nasdaq:SCMR] - down about 20% from late February and early March.

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