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2004 Top Ten: Turnarounds

Light Reading
News Analysis
Light Reading
12/30/2004
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In 2004, the telecom industry took another step away from the Hell it was roasting in at the start of the millennium. Several companies changed their fortunes this year, and several technologies, groups of companies, and ideas were hot on the comeback trail as well.

Consider the following list as a review, not of what was most memorable or remarkable about 2004, but of what appeared to change the most -- and mostly for the better. And, as always, use the message boards below to remind us of any companies, ideas, or technologies you think we should have included (or left off). Here's the list:

No. 10: General Bandwidth

For much of its five-year history, VOIP equipment vendor General Bandwidth Inc. has been a struggling, single-product company that saw little revenue as it burned venture capital and had trouble raising more. But in April the company was thrown a life line (at the last moment, sources say) in the form of a financing deal with Alcatel SA (NYSE: ALA; Paris: CGEP:PA); and since then things have been looking up. During the last half of 2004, the company landed some new and noteworthy customers, installed some new leadership, and earned the praise of analysts and investors (see General Bandwidth Drafts New CEO, HR Ranks General Bandwidth First, and General Bandwidth Adds Some S&M).

No. 9: Telecom Industry Sentiment

There is still a huge amount of uncertainty in the telecom world, but, compared to years past, this year proved to be very clear in many respects. For instance, it is clear what services carriers need to offer and what renovations they need to make to their access networks to enable those services. This focused vision makes growth seem very palatable (see Service Providers See Growth in 2005). It is also clear that Ethernet has become the universal data link layer -- the single “universal jack” through which operators provision services on demand, from best effort to premium, with scaleability to a full Gigabit (see Letter From TIC). There are several other signs that the industry is recovering from the telecom depression, but we won't draw them all out here. Suffice it to say, things are looking up, and that's a huge change from how the industry felt and acted last year (see 2004 Top Ten: Signs of Recovery). No. 8: Juniper Networks

Okay, Juniper Networks Inc. (Nasdaq: JNPR) was never really down in the dumps. But after a modest financial recovery in 2003, it kept coming back. Its share price looks to be closing out the year near its 52-week high of around $30, after starting the year near $20. And the company hasn't been sitting still. Juniper made some big moves in 2004, the largest of which was its purchase of NetScreen. We also can’t overlook the fact that Juniper won two Leading Lights awards (see LR Reveals Leading Lights Winners).

No. 7: Sonus Networks

Sonus Networks Inc. (Nasdaq: SONS) was on this list of top turnarounds in 2003 (see 2003 Top Nine: Turnarounds), but then it started off 2004 with a bang, and not in the good sense: accounting scandals and restatements, a plummeting share price, and angry shareholders (see Sonus Delays Q4 Results, Sonus Drops a Bomb, Sonus Redeploys CFO, and SEC Steps Up Sonus Probe). Hey, that just makes a good chance for another comeback, right?

In retrospect, much of the hysteria from earlier in the year seems overdone. Sonus looks to have cleaned up its accounting snafus -- which were rather minor in nature when compared to WorldCom-sized problems -- and in the third quarter of this year it posted a solid $46.8 million revenue number and was profitable to the tune of $10 million and four cents per share (see Sonus Reports Rising Q3 Revenues). These numbers were all up from last year’s comparable numbers.

While Wall Street was right to have put Sonus in the penalty box, its technology positioning remains first-rate. It’s still the dominant public company in the softswitching market, an area in which many incumbents such as Lucent Technologies Inc. (NYSE: LU) and Cisco Systems Inc. (Nasdaq: CSCO) are still working on their strategies.

No. 6: Lucent

For Lucent, 2004 was a year of stronger numbers; product and technology advances; and a revitalized sales pipeline (see Lucent Announces Everything). The company reported a profit for its full financial year (ended September 30, 2004) -- its first since 2000. Lucent officials say the bulk of the growth came from the mobility sector, where the company benefited from mobile service providers' move toward 3G networks. Revenues for the Mobility division were $4.01 billion, an increase of 30 percent from fiscal year 2003.

Lucent landed some impressive next-generation network deals this year, and looks well placed to further benefit from wireless operator consolidation (see Wireless Merger Favors Lucent, Nortel). And, if executive pay is any measure, it was indeed a good year: CEO Pat Russo's total compensation more than doubled in 2004 (see Lucent's Fat Cats Get Fatter).

No. 5: Traffic Management

Cisco's acquisition of P-Cube this year signaled the fact that traffic management equipment -- hardware used by service providers to manage the bandwidth usage of subscribers -- is a legitimate market space.

The purchase of P-Cube will no doubt lead to greater acceptance of the technology among both vendors and service providers. But it makes sense: As applications become more bandwidth-intensive, the hardware that monitors, prioritizes, and budgets out bandwidth will become important. Traffic management has arrived, not just for its ability to help service providers ease strained networks, but also for the ability to help carriers bill for different classes of bandwidth. No. 4: DSL Technology

Poor DSL. Fiber gets all the headlines, but DSL's still growing like mad. It’s added global subscribers at close to a 60 percent annual growth rate, according to the DSL Forum.

Despite such growth, however, DSL in the last couple of years has suffered from somewhat of an image crisis, with so much attention focused on FTTP. But in 2004, DSL got some major upgrades, in the form of ADSL2+ and VDSL, which will now provide service providers enough bandwidth to supply video over copper. This is a big deal, given the cost of trenching for fiber all the way to the home (see Bottleneck Blowout).

Note that we’re talking about the technology here -- not the equipment providers. DSL equipment sales are definitely not growing like they used to. But bandwidth that can be sent over copper lines is growing by leaps and bounds, and deployment of next-generation DSL technologies should be strong going into 2005 (see BellSouth Boasts DSL Growth and Report: Broadband Revenues to Grow).

No. 3: Cisco’s Core Routing Strategy

The industry said Cisco Systems Inc. (Nasdaq: CSCO) couldn’t build a carrier-class router and, for a while, it didn't. But Cisco persevered through years of roadblocks (both technical and bureaucratic) and built an absolute beast of a router. They built it. We tested it (see Cisco's CRS-1 Passes Our Test). It really works. And it is officially award-winning. It can't be said enough: The CRS-1 is Cisco's most important product in years. No. 2: Capital Spending

The year 2004 may be remembered for some time as the year that telecom capital spending bottomed -- and actually started to grow again (see Insider Sees 'Calm' Capex Growth, Service Providers See Growth in 2005, Report: Carrier Capex Increasing, and S&P: Comms Kit Capex Rebounding). After a solid three years of decline, most analysts said capital spending numbers show a slight lift in 2004, and they expect continued single-digit percentage growth in 2005. If it turns into a multiyear trend, it will certainly be the comeback story of the decade.

What’s tricky about capex is not predicting how much will be spent altogether, but where the lion’s share will go. That has some analysts tagging access as the biggest growth market (see FTTP Bulls Talk Billions , UBS: Capex Shift to Hit Vendors, and Analyst Sees Shift in Capex Trends ). IP routers and VOIP infrastructure gear are still growing at a nice clip, so expect a fair share to be spent in those areas in 2005.

No. 1: The RBOCs

Everybody kicked the RBOCs -- especially BellSouth Corp. (NYSE: BLS), SBC Communications Inc. (NYSE: SBC), and Verizon Communications Inc. (NYSE: VZ) -- during the telecom dog days. But all they had to do was whisper “fiber access,” and they were groovy again (see SBC Sheds Light on 'Lightspeed'). Are the RBOCs really getting hip with Triple Play, or is it just like a geek in high school who tried the quick makeover haircut? Too early to tell -- but from what many Light Readers say, the spending is for real. The race to install video remains their pain point, and many folks remain skeptical that the RBOCs get the “content” thing.

The RBOCs never went anywhere during the recession, but 2004 was the year they collectively began to reassert their power and position. Expect more action in the RBOC space in 2005, as they contemplate mergers with IXCs, wireless network convergence, service distribution deals with Web portals such as Google (Nasdaq: GOOG) and Yahoo Inc. (Nasdaq: YHOO), and even international expansion in unregulated areas such as VOIP. It’s nice to be loved again, isn’t it?

— The Staff, Light Reading

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