By Lisa Thompson
OTC:POETF | TSX:PTK.V
READ THE FULL POETF RESEARCH REPORT
Although some revenues will slip out of 2022 due to the need for further development, POET (OTC:POETF) (TSX:PTK.V) is still confident of revenues coming in as planned in the out years. One of the reasons for this is the opportunity it sees in medtech and wearables. Its competitor Rockley Photonics is getting a high valuation as it is partnered with Apple in wearables, but POET believes it can develop a superior solution based on features built into its optical interposer platform that can be directly applied to spectrometers and sensors and is working to address that market. With the Rockley-Apple precedent, POET is in talks with large wearable and mobile phone manufacturers in China and Korea and is working with a Chinese company already active in the field to design a product. POET has demonstrated an ability to develop products rapidly and at much lower cost to its competitors (nearly $400 million and eight years of development by Rockley and only $50 million and four years for POET) due to the simplicity of design of the POET optical interposer. In fact, the largest wearables company is not Apple but Huamei (Amazfit), a Chinese company. POET expects to have deal announced in the first half of 2022 in this market, and would base a capital raise on funding a team in China to build a spectrometer. Rockley has based its product on expensive Silicon Photonics and LEDs that do not have enough wavelengths and thus data, but POET’s solution would be smaller, less expensive and based on lasers able to penetrate the skin and provide information on many more metrics.
POET Breaks Out Joint Venture Results in Q3 as it Moves Closer to Reporting Revenues
In Q3 POET continued to make progress generating interest in its platform. It attended the two leading optoelectronics conferences and exhibitions in China where it showed Optical Engine products and its Optical Interposer platform. In fact, Shenzhen Fibertop Technology (joint venture customer one) a transceiver module supplier, saw POET’s solution at the answer to its product path dilemma and has already announced its plans to incorporate POET Optical Engines in its line of optical modules as soon as they are available. Also during the quarter POET shipped its first 100G Transmit (Tx) Optical Engine sample to a leading European optical systems company.
This quarter for the first time POET reported results from its joint venture as a stand-alone company and vows to provide full income statements on the joint venture in future earnings filings. In Q3, POET reported that the 92.5% of the JV that POET owns spent a cumulative $635,000 since the creation of the joint venture. The percent ownership of the JV that POET owns will reset as its partner adds capital to buy equipment and pay expenses and we expect every quarter the percentage will decline change. Six quarters from now we expect ownership to be 50/50. Strangely, even though POET owns well over 50% of the JV, it does not consolidate its revenues as neither company has operating control of the entity. We expect that investors will have to value POET without the JV results separately from the JV and then add the two together to value POET’s per share value. To further confuse things, the joint venture has the potential of becoming a separate public company on the Shanghai Stock Exchange STAR Market where valuations are sky high and companies can trade at 15 times revenues.
To recap, the joint venture is pursuing all customers for 100G, 200G customers for datacom and 400G customers only in China. POET has the rights to revenue from 400G products outside China and any other verticals other than 100G and 200G datacom. Only revenues from POET customers will show up at revenues on the income statement. All other revenues booked by the joint venture will only appear in the MD&A section when reporting and POET’s net income from the JV will be the only thing on its income statement. Because of this investors should be aware of which customers will generate revenues for whom. As a result we are going to refer to unnamed customers by whom they buy from: the JV or POET. For example, Fibertop is JV customer number one. The European customer announced in October that committed for a unique multi-engine design for 100G CWDM4 and 100G LR4 Optical Engines based on the POET Optical Interposer, we can refer to as POET European customer one. The combined value of the NRE and the purchase order for initial units from this customer is expected to generate over US$1.2 million in revenues for POET. Interestingly, this customer told POET to focus on getting it the LR4 product first as it sees that as a its greater near term opportunity. The LR4 product is directed at the client side of major telecom networks, between a transport network backbone to data centers and customer locations globally. The POET solution will provide superior performance at a price that cannot be matched today by competing solutions. LightCounting increased its market estimate for 100G LR4 transceiver modules with a 10km reach, and now predicts rather than a flat market, that market could grow from $300 million a year to $700 million by 2025.
The key to POET’s superior solution is that modules based on its Optical Engine can deliver the equivalent of 200G to 400G speeds using established 100G technology. As seen on the image below, compared to the TOSA/ROSA product on the left currently in use, the POET solution on the right is much smaller and uniquely integrates the mux and demux. This results in a smaller, cheaper solution that also uses 10% to 15% less power. The 400G FR4 product is expected to provide the first revenues direct to POET possibly by Q3 2022. The 100G CWDM products sold into China will generate the first revenues for the joint venture and will ship earlier than Q3.
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