By Candace Stuart
Small Times Senior Writer

April 5, 2002 — Two years ago this month, employees at Cronos Integrated Microsystems in North Carolina celebrated what was a sizable coup for a MEMS startup: a $750 million stock deal to join JDS Uniphase Corp.

JDS Uniphase followed up by announcing plans to buy a 177,000-square-foot semiconductor facility in North Carolina’s Research Triangle Park from Motorola to allow Cronos to expand.

Analysts praised the move, saying that Cronos’ micromirror switches positioned JDSU to become a dominant supplier for all-optical networks needed to speed up the telecommunications pipeline. The optical switching market alone was projected to top $2 billion by 2004. JDSU stock sometimes fetched more than $100 a share the month it acquired Cronos, allowing the company to go on a multibillion-dollar buying spree.

Now a share hovers between $5 and $6 as the telecom industry recuperates from recession. JDSU sliced its workforce by more than half and promised more belt-tightening for 2002 amid a glutted optical components market. Cronos lost its name, about a quarter of its staff, mothballed plans for its manufacturing facility and may be asked to abandon its spacious headquarters later this year.

On its two-year anniversary, what is now called the MEMS Business Unit of JDS Uniphase is celebrating still — but soberly, with the conviction that as tough as the past year has been, it would have been worse had Cronos remained independent. With no turnaround imminent, the unit will stick with a more modest but marketable product lineup that better suits today’s customers, and maintain a foundry at MCNC, the nearby research center where Cronos was founded. It’s a strategy that could pay off as early as this year, analysts said.

“The market change was so dramatic, and so unforeseen, I certainly couldn’t sit here today and say we would have been prepared,” said Jesko von Windheim, vice president and general manager of the MEMS Business Unit. JDSU, which in general maintains a strong cash position, offered a partial haven during the economic downturn. “As part of a large company that is very well financially positioned, we’re better off than had we been on our own.”

In the long run, what was once Cronos and its parent corporation JDSU will survive the telecom drought, analysts said. What has been a painful downturn brings a more realistic but conservative customer who demands reliable and cost-effective products that ensure competitive advantages. By pairing itself with the experienced components supplier JDSU, the MEMS group may be in the position to deliver when demand resumes, they said.

“JDS is the components leader,” said Daryl Inniss, a senior analyst for optical components with RHK Inc. Inniss worked at JDSU and Lucent Technologies Inc. before joining the market research and consulting firm RHK. “JDS knows how to bring products to market. It will commercialize products made by Cronos where appropriate.”

JDSU made the MEMS group leaner and more focused, von Windheim said. Market conditions forced it to pull the plug on the new fabrication facility in the former Motorola building before it was ever used and cut staff by 30 to 35 people. The moves were necessary to keep costs down, von Windheim said.

“If you go forward in this kind of environment with too high a cost structure, you’re just not going to be competitive,” he said. “We positioned ourselves to be more competitive, and it was a positive correcting.”

Von Windheim and analysts also credit JDSU for developing a better MEMS product line. Two years ago, Cronos did not understand customer needs or how to meet them, von Windheim said. Cronos supplied MEMS parts but not the packaging, a business model that was effective but always one step removed from the buyer, he said. Without customer feedback, their product development was limited.

That barrier was lifted by joining JDSU. Historically, JDSU has worked closely with Nortel Networks Corp., Lucent and other customers to create networks based on a variety of is products. With those channels open, the MEMS group has been able to focus on products that have a more realistic chance of finding a market.

“Cronos had MEMS solutions, but by and large they didn’t understand the (telecom) market,” said Marlene Bourne, a senior analyst with In-Stat/MDR who specializes in MEMS. Since the acquisition, she said, the company’s devices “have improved considerably. Each year they get better.”

‘We’ve learned a lot from being part of JDSU,” von Windheim said. “I think ultimately the products that are emerging in the pipeline today are better thought out than what we envisioned when we were just on our own.”

The MEMS group revised ambitious goals set in 2000 when Wall Street believed an insatiable need for a fast Internet would compel the telecoms to switch to all-optical networks. It now focuses on 2-by-2 switches and attenuators, MEMS devices that function in a variety of optical networks.

The switches rely on micromachined mirrors that redirect light signals. The 2-by-2 switches receive signals from two fibers and bounce them to output ports for two different fibers. Attenuators help manage power levels. The group fabricates the parts on silicon using high-volume, low-cost chip-making techniques. Although not as elaborate as the optical arrays proposed by a number of companies in 2000, the devices are more likely to meet the price and performance demands of today’s carriers, Inniss said.

JDSU is selling switches and attenuators separately and in larger systems, von Windheim said. He would not name customers or provide details. Inniss added that the industry is “in testing mode,” buying components for trial runs in networks. He predicted several more quarters of stagnation before carriers deplete their inventories and need new components.

“There may be bumps in the road, but it is pretty much stabilizing,” Inniss said. “It’s just a matter of time before they upgrade.”

JDSU will survive in the interim because it offers a broad base of products, Inniss said. But conditions remain tough. The corporation faces a class action lawsuit over its acquisition practices, and continues to cut costs after seeing sales drop by about a third in the last quarter of 2001 compared to 2000. The MEMS Business Unit may relocate if sales don’t pick up, but will maintain its foundry services at MCNC.

JDSU sees the value of having MEMS components, Bourne said, and will continue to support the technology. Inniss added that the telecom industry also appreciates the potential of MEMS devices, which strengthens the North Carolina unit’s position within JDSU.

Both analysts said that maintaining fabrication capabilities was a plus because it allowed the MEMS group to ramp up quickly if demand grows, and ensure the quality of its devices. Since being acquired, the group received certification from the telecommunications industry for meeting stringent quality control requirements. It has continued offering foundry services to outside clients. But its core mission remains in MEMS optical components as it enters its third year with JDSU, von Windheim said.

“We going on the assumption that one day life will go on, that inventory will be used up,” he said. “The focus is still strongly on telecom.”

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