I wanted to make a point about a story that came up toward the end of last year, about ALU having lower than expected margins on their optical transport sales and this hurt them in market perception.
First, I want to make clear, I have no insider knowledge of any kind. However, I have worked in the high speed transport space for more than 2 decades.
So, that being said, one thing I would watch for in 2013 and 2014 is the ALU margins in optical transport.
Now, agreed, the ALU problems could possibly be for some of or a mix of all of the reasons speculated about in the other thread about ALU margins in optical. Management, too much overhead, possibly because it is a "French" company (not!), too many competitors, some technology problem, margin pressure due to the much feared "Chinese".... etc.
OR, it could be that the optical margins for this last year followed a totally normal pattern. What I mean by this is that the shelves / racks for systems, all the common hardware like ROADM's and EDFA's, etc. that gets installed first when new technologies are rolled out almost always have lower margins.
This is the same for NSN, Ericsson, ALU, Huawei, and IFN.
Where margins are normally made is on the expansion ports as new line cards are added, new add/drops on ROADMs are activated (again, this leads to more ports or line cards on systme), when new lambda's are lit up after the initial systems are powered up on first installs. This is classically where all the optical vendors make their margins. If you could look into first installed optical transport systems revenues in many generations of technology, and break out the numbers, installs of first systems with few line cards on initial install almost always have narrow margins.
But here is the thing: now the various suppliers, ALU in this case, has the installed base. The carrier has absorbed a lot of the cost during the install phase with all the common gear. So the carier can easily slide in new cards to expand. The carriers are locked into a 5 year capx write off cycle (some do use other time periods for capx write offs). But if all they need to do is install a new line card and do some software configuration of the ROADm ports, it is relatively straightforward. As line cards are added, carriers margins improve on system investments and it is relatively easy to justify as carriers light up these new lambda's only as demand can pay for it. The ecomomics of new sytem installs improves for carriers with more line cards at 100g.
And likewise in these line card additions, the systems OEM's make very nice margins as well.
What I would be watching for is ALU's margins to improve in coming 1-2 years as they start to populate these newly installed systems for 100G with multiple degree ROADMs. ALU has made a lot of design wins as one of the leading suppliers of 100g platforms (of course there are others with their own design wins... ). iF ALU can manage the business properly, and this follows normal cyclical carrier new systems roll out and implementation, then ALU should have expanding margins in coming several quarters in optical transport. Given the pressures to devilver more bandwidth for both access and wireless transport (backhaul and interconnection to the internet) along with high bandwidth cloud services and massive data centers like Google and Amazon and Facebook; I would expect that carriers will need to continue to rapidly expand transport capacity, so this could be a good news story for optical margins for those who have won the systems platform installs for next wave of network growth (those who have won the 100g platforms including Ciena, ALU, Huawei, IFN, and a few others.).
(NOTE: for the IFN followers: this is one of the several reasons IFN had lower margins in some relatively big quarters, new systems going in.... and one of the reaons IFN has higher margins in other quarters... new line cards going into already installed platforms bring higher margins: watching this trend, and understanding this cycle, is key to understanding IFN stock performance Everyone is waiting to see can IFN ride the large and growing installed base and light up more banks of channels in those already installed systems and make better revenues and margins. There simply has not been enough time to see if IFN can really make it happen.)
So for 2013, watch those margin numbers in optical transport. If they go up, then ALU did the right thing in winning platform installs and locking up the foot print. Even if they had to leverage this with lower margins for thos platform wins. If they did it correctly, the could see expanding margins on the horizon in optical transport. If they did it incorrectly and are unable to capitalize on thier large installed base (they have a lot of wins in 100G as stated previously), then they are in big big trouble.
No predictions. Just something to watch for. And to watch for additional platform wins. The platform wars for foot print in 100g are not quite fully settled, but I expect them to be in the next 24 months or so.
sailboat
onto 400G! and 1gig to every user including wireless!
