NEW YORK -- Equipment vendors gathered for the last day of Salomon Smith Barney’s Tech2002 Industry Conference in New York were all pretty much singing the same, melancholic tune today.

Far removed from the optimism and hubris that characterized so many of these conferences in the past, presidents and CFOs of five different equipment vendors stood almost humbly on their podiums outlining their views on where they see the market heading and how they plan to get a piece of it.

While the vendors, Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), Foundry Networks Inc. (Nasdaq: FDRY), Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Riverstone Networks Inc. (Nasdaq: RSTN), produce different network equipment and address a range of different markets, their overall message was the same: Forget the miracle products that transform a customer’s network frog into a next-generation prince overnight. Faced with the new market reality, products that can be added to the existing infrastructure to allow incremental growth are the way to go.

"Equipment has to fit into the overall network, and must provide cost-savings and/or increased revenues," said Janet Davidson, the president of Lucent’s Integrated Network Solutions Group. “You can’t just be a box-player… You have to have a game plan.”

Archrival Nortel couldn’t agree more. Talking of the changeover from Asynchronous Transfer Mode (ATM) to Multiprotocol Label Switching (MPLS), Nortel’s president of metro and enterprise networks, Frank Plastina, insisted that it will be a very gradual migration. “Right now, service providers will stick to ATM and evolve towards MPLS,” he said in his keynote speech this morning. “If you’re going to a service provider with an all-ATM switch solution or an all-MPLS solution, you’ll still lose.”

In the midst of a market that is looking more and more like a gory scene from a slasher film, the vendor execs were doing their best to emphasize the positive: Although customers may not be looking to make the leap of faith into next-generation networking now, they are still preparing their networks for a future transition.

“We see a lot of customers upgrading their networks today to deploy voice over IP next year,” Michael Iburg, Foundry Network’s treasurer said. According to Foundry CFO Tim Heffner, the company’s switch sales rose by about 50 percent last quarter, although the customers were buying a lot fewer line cards to fill them with. Since Foundry’s boxes only hold Foundry line cards, Heffner says that this represents a true opportunity for the company, securing future sales. “Right now, no one’s doing huge buildouts."

In comparison to many other vendors, Foundry has less reason to complain about the current market situation. While the company used to rely mainly on sales to service providers, it now claims to get about 80 percent of its revenues from enterprise customers, which have been hit less hard by the downturn.

According to Nortel’s Plastina, the service provider market isn’t going to get better anytime soon. In his speech today he said Nortel expects spending in the global telecom market to remain flat or decrease next year. “Our new breakeven point was set in that context." On the other hand, he claimed Nortel’s enterprise business remains healthy (see Nortel Lowers Outlook).

Other vendors are not only refocusing their products to accommodate more incremental growth, but also shifting their target market away from the struggling service providers.

“When we look at our business model, we think ‘great long-term market,’ but shorter term we need to find [revenue sources],” Riverstone CFO Bob Stanton said in his presentation. Riverstone, which only a few weeks ago announced that it was laying off about a third of its staff and cutting its revenue forecast for its second quarter from $30 million to between $10 million and $15 million (see Riverstone Stock Sinks, Company Shifts), has seen its source of income dry up as the service provider market it targets has drawn its purse strings ever tighter. The company recently revealed that it will be shifting some of its focus to enterprise customers.

“What a difference a year makes,” were the first words of Stanton’s presentation. “By the time I get here next year, hopefully it will be a different picture for us.”

— Eugénie Larson, Reporter, Light Reading
www.lightreading.com