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Cisco Denies Optical Slowdown

Phil Harvey
2/28/2006

Is Cisco Systems Inc. (Nasdaq: CSCO)'s flagship optical product line –- the ONS 15454 -– long for this world?

It seems a loaded question, given the product's huge installed base and the fact that Cisco originally paid nearly $7 billion in stock for it when it acquired Cerent Corp. in 1999.

Service providers and Cisco competitors say Cisco is strengthening its hand in other technology areas, reporting huge year-over-year revenue drops in optical, and investing less in TDM-based technologies. (See Cisco Rallies in Q2, Hides Optical and Cisco Delivers Mixed Bag.)

But Chris Rivera, director of product marketing for Cisco's optical networking group, disputes any suggestion that Cisco has lost its flair for the ONS 15454. "Over the past 24 months, this platform has seen tremendous investment," he says, "and we've done this investment in line with a strategy with what we believe is the network infrastructure transition."

What transition? "If packets are driving bandwidth demand, the network –- from a cost and economics perspective -- is going to need to be transitioned to a more packet-optimized infrastructure on the transport side," Rivera explains.

That transition, interestingly, is shaping Cisco at every level as it makes more acquisitions in home networking, video, and consumer products. (See Cisco to Acquire Scientific-Atlanta, Cisco KiSSes Up to Telco TV, and Cisco Buying Linksys for $500M.)

Late last fall, Cisco shifted several jobs in its optical networking group to work on its MSTP (Multiservice Transport Platform) products and other areas. (See Cisco Swaps Opto Jobs.) "When we made this resource shift, we gave people the opportunity to go into these different areas," Rivera says. "Some of them took the opportunity and some of them chose not to."

Analysts, too, sense that carriers are interested in slowing spending on Sonet-based platforms. "Our recent survey here at Heavy Reading bears this out: Nearly a third of operators worldwide said they would prefer to cap spending on Sonet/SDH and move to pure packet-over-optical transport solutions," says Scott Clavenna, chief analyst at Heavy Reading.

"It looks like Cisco will focus its optical efforts on adding WDM to their router and switch lines rather than be a pure Sonet and SDH player," Clavenna says. And Cisco's recent hires appear to reflect that thinking. (See Cisco Taps Cerent Vet and Former Avici CEO Joins Cisco.)

In his December report on the subject of Sonet-to-Ethernet migrations, Clavenna made no bones about the fact that the carrier world isn't clamoring for new Sonet/SDH systems.

"In the capital-constrained times of 2001-2005, next-gen Sonet/SDH made perfect sense; but as 2006 approaches, carriers are finding that the projected impact of Ethernet, FTTx-enabled high-speed consumer broadband, and unicast video can add such significant bandwidth to a Sonet network that overlays may be required," Clavenna wrote. "Carriers now have many options for such an overlay, from multiservice Sonet/SDH to pure Ethernet transport to G.709-based OTNs. Migration, therefore, has become the watchword of 2005-2006."

But is Cisco's optical group growing or shrinking?

Rivera won't take the question head on, but he did opine on Cisco's optical revenue numbers.

John Chambers, Cisco's CEO, has reported a 40 percent year-over-year decrease in optical revenues and a 34 percent annual decline for Cisco's first and second quarters of fiscal 2006.

Rivera says one big customer made all the difference -- giving Cisco's optical group the appearance of slipping.

"What happened last year is that we had a massive order in two quarters from overseas –- I mean a massive order," he says. "I can't quote how much it was, but it was huge. If you take a look at the normalized growth, the MSPP platform has been growing at 10 to 12 percent a quarter since calendar year '04."

Last week, Dell'Oro Group announced the worldwide optical transport market grew at less than half that rate -- 22 percent in 2005. That report measured DWDM long-haul systems, WDM metro, Sonet/SDH ADMs, Sonet/SDH multiservice, and optical switches. But Cisco, the router king, didn't crack the top four. (See Router Market Grows .)

Some sources close to Cisco say the company may be building a packet-based MSPP, a device that would eventually phase out the ONS 15454. Light Reading has reported on the existence of a Cisco packet MSPP since December 2005. Cisco, though, isn't letting that rumor spread without a fight.

"We believe the MSPP market is a hybrid TDM-plus-packetized data market. Our product for the MSPP space now and moving forward is the Cisco ONS 15454 platform," says Rivera.

Rivera confirms that the seventh release of the ONS 15454 is coming out in March and that the eighth will hit by the end of this year. And Cisco is still committing to new updates of the product, according to customers called by Light Reading.

"Release 7 is focused more towards packet-level stuff, and Release 8 adds more of that capability plus a lot more intelligence at the Layer 2 level within this architecture," says one Cisco ONS 15454 carrier customer who did not want to be named.

Still, on conference calls, Chambers has said the company's future isn't tied to optical transport. "We intend to maintain our investment in WDM technology and decrease our investment in TDM optical technology over time," he said in January.

So will Cisco kill the ONS 15454? If so, it won't happen anytime soon. "With the amount of investment that we've done, we need to make sure people don't believe it's being killed," Rivera says. "It just can't be, right?"

— Phil Harvey, News Editor, Light Reading

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paolo.franzoi
paolo.franzoi
12/5/2012 | 4:04:38 AM
re: Cisco Denies Optical Slowdown

1 - Cisco claimed $1B in revenue at the height of the 14454. Are they saying it is still $1B or is under $200M more like it?

2 - How many boxes (say an estimate of 0 might be accurate) did they sell to BellSouth with their big incumbent win?

3 - If the product is being worked on so hard, why are the parking lots at Cerent so empty?

seven
DCITDave
DCITDave
12/5/2012 | 4:04:37 AM
re: Cisco Denies Optical Slowdown
1. They won't say. One thing Cisco has consistently done on the optical side is combine that group's revenues with that of other tech groups. This makes the group's financial performance nearly impossible to track.

2. Not sure. We should double check that. I would also like more info on this huge Euro win that gave them such a boost a year ago.

3. The parking lots in Richardson may be filling up as those are being emptied. I need to get over there and see what's up sometime soon. I understand they've moved lots of optical development over to Richardson.
lonestranger
lonestranger
12/5/2012 | 4:04:37 AM
re: Cisco Denies Optical Slowdown
Its over - $6B plus all else that's been invested over the years.

Petaluma is dying. Richardson is dead - only a small sustaining team is left on the 15600 (they were wiped out in the last round of layoffs). San Jose was cleaned out a few years ago and no one noticed.

The "New" Packet ADM project is being killed in favor of switches built from other groups. They basically exited the international markets and no one noticed. People are leaving in droves (both willingly and unwillingly).

Its been made clear to the team that there will only be limited investment in the 15454 going forward.

The mistakes made by Cisco on this deal will make the best BC Business Case of what not to do.

All that's left is for someone to turn out the lights when the last one walks out the door...
materialgirl
materialgirl
12/5/2012 | 4:04:35 AM
re: Cisco Denies Optical Slowdown
In their conference calls, management stated last quarter that optical would be removed as a line item in their "AT" (Advanced Technology) group, and dispersed as WDM interfaces throughout other groups. That means "Optical" will cease to exist as a mentioned (if not reported) line item.

It seems that after paying $7B for Cerent, the admission that they had to do "significant investment" shows a boner here. Who pays $7B for a tear-down? Finally, why oh why did the king of packet networks pay up for SONET gear to begin with? They should have known better, and recent history proves this.
chips_ahoy
chips_ahoy
12/5/2012 | 4:04:33 AM
re: Cisco Denies Optical Slowdown
interesting choice of words MG.
netskeptic
netskeptic
12/5/2012 | 4:04:31 AM
re: Cisco Denies Optical Slowdown
Cisco paid with its overinflated stock, so it was not so bad deal after all.
^Eagle^
^Eagle^
12/5/2012 | 4:04:28 AM
re: Cisco Denies Optical Slowdown
to your comment on "why oh why did the king of packets pay 7B for SONET/SDH gear".....

Well lets work it out. Although Cisco sold a LOT of those 15454 boxes, they truly stopped major innovation on the platform a few years ago. Since then there have been mostly bolt on features.. like adding a DWDM external shelf and kludging the box into being a DWDM terminal.

Ok.. so we can debate the strength of the box...

Second, Cisco forgot that in the carrier space, the competition is not so simple as coming to market first with a new type of box and grabbing market share. You also have to build a relevant, competent carrier service and support organization. While Cisco got some good staff from acquisitions and hires, overall Cisco has never really gotten it when it comes to carriers and transport. In many "cerent" sales, they bundled together the Cerent boxes with great deals on routers....hmmm

3rd, Cisco, forgot (again) that competition was fierce. It didn't take Fujitsu and others to add features and redesign their boxes to have all the feature set that the 15454 did (Quasi MSSP box), but additionally have a more scalable box, more scalable system and more ability to supply END TO END network gear. Cisco with the 15454 was never able to provide a carrier with an end to end network with all the boxes, widgets and management interfaces needed for a telco network. The 15454 was a "band aid" type patch that delivered a nice mix of services. The height of the deployment phase was not long after Cisco bought it and before the other player (the entrenced players: Lucent, Nortel, Fujitsu, Alcatel) got the features of the 454 into their own platforms.

Carriers like to buy from strong players that can provide support, and have deep network knowledge and ability to supply more than just a box.

Finally, lets look at the dollars. Even with Cisco selling a whole lot of these boxes, with a 7B investment, did they ever make money on it? Well.. that is difficult. On the face of it, with simple analysis: number of boxes sold x margin per box = some number. I would wager that simplistic calculation shows that Cisco never made a dime off Cerent. ooooh, but Cisco didn't actually pay a dime for Cerent. They paid in inflated stock. So... Cisco may not have lost so much money on this as it looks. The true numbers are hidden in the inflation and then deflation of the Cisco stock.

The founders of Cerent and all early employees made out like bandits. Wish I were one of them.

The major stock holders of Cisco did OK too. They largely cashed out when things were near the peak. Key Cisco employees and management did ok as well... again, cashed out shares as they could at various peaks. Who got left holding the bag are the employees who have to wait 4 years for vesting.. who joined near the peak... their stock is long underwater. Who else got burned.... hmmm.. well the small investor out in middle class land who doesn't have enough information to see that if you got in and got out like the big money guys.. you did OK. but if you were trying to build a long term portfolio to fund retirement... odds are those people are still way underwater from stock and mutual fund purchases done in 2000 or earlier.

Cisco Petaluma guys..and gals... I feel for you. But only a little. While lots of others have suffered in this "nuclear winter" of telecom, the harsh reality is finally catching up with Petaluma. Petaluma staff had a relatively easy ride over this time period.

Best of luck to all the Cisco Opto team.

sailboat
paolo.franzoi
paolo.franzoi
12/5/2012 | 4:04:28 AM
re: Cisco Denies Optical Slowdown

sailboat,

FYI, you calculate the "did they make money off this" improperly. It is not $7B of revenue. It is $7B of PROFIT.

On the other hand, Cisco handed out shares like water during the bubble. It cost the company nothing. The shareholders were diluted slightly. Real cost to Cisco, squat.

seven
optiplayer
optiplayer
12/5/2012 | 4:04:27 AM
re: Cisco Denies Optical Slowdown
"Cisco paid with its overinflated stock, so it was not so bad deal after all."

The stock was not quite as inflated as some might think. At the time the deal was announced (August '99) Cisco traded around $34/share and was $37/share when the deal closed later that year. It subsequently ran to $81/share in March 2000 and it held above $34 until February 2001 before it collapsed to the teens so there was a pretty good window for any pre-acquisition employee at Cerent to cash out.

For a time, the Cerent acquisition by Cisco and the Lightera acquisition by Ciena looked to be the only positive deals in the optical space though neither has proved sustainable.
maryhadalambda
maryhadalambda
12/5/2012 | 4:04:21 AM
re: Cisco Denies Optical Slowdown
Thanks to Cisco's overpaying for Cerent. Now Chambers and crew quietly shutting down yet another dismal failure of an acquisition. Besides Crescendo, has any acquisition ever really paid off all that much for them? They let the Arrowpoint business go to hell and F5's picking up market share there. A stupid company with good salespeople.
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