Optical/IP Networks

ADVA Earns Reseller Returns

ADVA AG Optical Networking (Frankfurt: ADV) claims it's got the key to succeeding in today's tough market. And on its earnings call today, execs shared their secret (see ADVA Improves Revenues).

ADVA executives say the company has seen "erosion" in terms of how much its existing customers are buying, but the vendor has counteracted this trend by partnering with big names in the enterprise business. That reseller business has helped keep its sales numbers healthy.

"We are staying stable because we're gaining new customers," said CEO Brian Protiva in a conference call presentation that included a market overview.

Executives say these new customer deals are being driven by ADVA's partnerships with big resellers like Siemens AG (NYSE: SI; Frankfurt: SIE) -- a deal ADVA established last year (see ADVA and Siemens Team Up). ADVA also has arranged to furnish Fujitsu Network Communications Inc. (FNC) and Hitachi Ltd. (NYSE: HIT; Paris: PHA) with equipment for resale, although Protiva says those probably won't start earning big bucks for ADVA until next year. The vendor's banking on the potential of an arrangement it has with IBM Global Services as well, to support its gear in North America.

Protiva says all this activity has enabled ADVA to gain market share this year.

This quarter, ADVA reported €22.3 million (about US$21.5 million) in revenue, a sequential increase of 3.3 percent. Pro forma operating income, while modest at €0.2 million (about $193,000), nevertheless doubled since last quarter. Pro forma net loss from continuing operations, now also at €0.2 million, represents over 90 percent improvement since this time last year.

The company is guiding toward similar earnings next quarter.

ADVA credits two things for these improvements: its market focus and its partnerships. As to market focus, ADVA says it's going after the metro DWDM market, which, while it's shrunk to roughly $130 million (one-quarter of its size last year) has still been damaged less than other segments.

Within that market, ADVA says core DWDM metro infrastructure is only expanding in selected portions of Europe and Asia. The key, the vendor says, is to aim to fill demand for enterprise IP data and storage services connectivity.

ADVA's pitch to carriers, according to Protiva, is that its metro DWDM gear will enable 10/100-Gbit/s Ethernet services to be deployed over existing enterprise networks. Such deployments will enable users to buy these high-bandwidth services at rates of $2,000 to $4,000 per month.

Key to getting the pitch across is peddling it through the right connections, particularly in Europe, where ADVA did 78 percent of its sales this quarter, compared with 15 percent in North America and 7 percent in the Asia/Pacific region.

Protiva, citing various market research reports, claims ADVA has a 17 percent share of the metro DWDM market, putting them in third place behind Nortel Networks Corp. (NYSE/Toronto: NT) and Ciena Corp. (Nasdaq: CIEN) (through its acquisition of ONI Systems Inc.), which are tied at first place, each with a 27 percent share.

According to Brian McCann, ADVA's chief marketing and strategy officer, the company now makes two thirds of its business through resellers and OEMs. And the combination of IP and storage applications accounts for better than 70 percent of revenues.

The question is: Can ADVA keep the momentum going? Several issues are involved. First, the overall market isn't improving. By Protiva's own admission, the bottom hasn't been reached just yet. If things fail to improve on ADVA's timetable -- namely, in 2003 -- then its projections are thrown off.

ADVA's strategy also is based on adding new customers, particularly among European ILECs (incumbent local exchange carriers) and enterprises. But that's just where competition is heating up. Ciena/ONI has targeted Europe as well (see Ciena to Merge, Shrink). Alcatel SA (NYSE: ALA; Paris: CGEP:PA) is also on the move. And Nortel is said to be winning a number of European contracts. As these competitors move in for shares of the Euro market, it's likely the pool of available new prospects will shrink.

And having strong partner relationships can also limit options. ADVA's ability to merge or acquire will be affected by its agreements with self-interested partners.

Brian McCann acknowledges that being a professional partner comes with risks. The company's been approached by a range of startups and "discussions always happen" with larger players around the M&A question, he says. But, he asserts, "We'd be crazy to look at something that would trade us down."

— Mary Jander, Senior Editor, Light Reading

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