Asia: Optical Boom or Bust?
Judging from the flood of contract announcements this earnings season, Asia is the place to be for optical and IP infrastructure equipment providers.
Natural question: Is it a marketing gimmick or real business? On the surface, the sudden flight to Asia looks to be timed suspiciously with the disappearance of business in North America. And details on the contract announcements are scarce.
At least one analyst says there might be reason for concern. Last week, Stephen Kamman, an analyst with CIBC World Markets, issued a report warning that networking companies could be becoming too reliant on sales to Asia. According to his report, 60 percent of the contract announcements in Q2 were announced in Asia, as were 75 percent of the contracts announced in July. Since the beginning of this year, Asian contract announcements have steadily grown from 10 percent of the January total, to 33 percent in March, to 50 percent in May and June.
“We are growing increasingly more concerned about the sector's strong reliance on Asian sales this quarter," he writes in the report. “We appreciate that announcements are not an accurate measure of revenue flows. However, we believe the trend is still meaningful.”
Another concern has to do with the validity of some of these contract announcements. One official from Unisphere Networks Inc. (Nasdaq: UNSP), a company that claims a strong presence in Asia, contends that some of its competitors announce contracts without ever signing a purchase order. While the real dollar value of contracts announced with U.S. or European carriers can also be difficult to determine, the problem is exacerbated in Asia where language barriers and limited access to information from government-run carriers impede the flow of information.
"Anytime there is a big contract announcement you have to ask what it really means," says Judy Benningson, director of product management for IP routing at Uniphere. "What’s the duration, what are the terms? Some companies can claim to have a big win, and it’s especially hard to verify that over there.”
Indeed, the Asian hype has been flowing. During its earnings call two weeks ago, Extreme Networks Inc. (Nasdaq: EXTR) noted that Asian sales accounted for 36 percent of its sales, up from 28 percent the quarter before (see Extreme Looks East). And its sales to Asia grew 100 percent overall during the quarter, with particularly strong sales in Korea and China.
Foundry Networks Inc. (Nasdaq: FDRY) also saw strong demand in Asia with a big contract win with China Telecom, pushing Asian sales up to 40 percent of its total revenues for the quarter (see Foundry Reports on Q2).
Even Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT), which overall reported disappointing results, cite Asia as a big growth opportunity. Lucent said its international product sales grew 26 percent sequentially from the quarter before. And Nortel said that its growth in wireless Internet was up 20 percent this past quarter in large part due to sales in Asia-Pacific (see Has Nortel Hit Bottom?)
And it’s not just equipment sales that are growing in Asia. Corning reported on its earnings call that it had seen increased sales of fiber in Asia, particularly in China (see Corning Posts Q2 Results). The company also made a $225 million investment in Asia with the purchase of Lucent Technologies' shares in Shanghai Fiber Optic Co. and Beijing Fiber Optic Cable Co.
Several companies have been highlighting their Asian deals in press releases. For example, Unisphere Networks plans to announce a deal with Chung Hwa Telecom in Taiwan this week. It already has more than 35 customers in Asia, including China Telecom, China Unicom, and 19 of the 31 incumbent carriers in China’s 31 provinces.
Other Asian highlights: Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) recently announced a deal with Chung Hwa Telecom for deployment in a next-generation research network; and Riverstone Networks Inc. (Nasdaq: RSTN), a competitor to Foundry and Extreme, has also announced several deals in Asia, including ones with Chung Hwa Telecom and Korea Telecom (see Avici, Riverstone Win in Taiwan). Optical powerhouse Ciena Corp. (Nasdaq: CIEN) has announced deals with Beijing IDN and with Flag Telecom (Nasdaq: FTHL; LSE: FTL) for deployment in its north Asian route. And metropolitan transport equipment provider ONI Systems Inc. (Nasdaq: ONIS) has announced a deal with Korea Telecom.
Even private startups are trying to get onto the Asian bandwagon. Alidian Networks Inc. announced a deal with the Korea Internet Neutral Exchange Center (KINX); and Ellacoya Networks Inc. has announced it is opening offices in Sydney, Tokyo, and Hong Kong, and is in the process of installing pilot deployments in China and Japan.
As if there weren't enough parallels to last year's unsustainable optical boom in North America, market research firms are now offering rosy projections for Asia. RHK Inc. has predicted the Asia-Pacific market for optical transport -- including shipments for WDM, Sonet/SDH, and DCS equipment -- will reach $6.2 billion in 2001, growing 57 percent from the $3.9 billion spent in 2000 (see RHK Projects Asia Growth). The firm expects the market to grow to $14.8 billion by 2004, fueled by deregulation in many Asian countries.
There are two key explanations for this growth in the Asian market. One is the rapid rise in wireless demand, which requires a buildout of IP and optical transport infrastructure to backhaul telephony and data traffic. The second is a strong demand for broadband services like DSL and Ethernet services in the metro area network, particularly in highly concentrated urban areas.
But CIBC's Kamman warns that the Asian bubble could burst like those in the U.S. and Europe. In his research, he notes that Asia is showing similar signs of slowdown to that of Europe. Particular areas of concern include weakening economic conditions in certain parts of Asia like Singapore, where a formal recession has been announced. Japan’s economy is also experiencing troubles, which could hurt carrier capital spending there. This may also affect the Korean and Taiwanese economies, which depend on export trade to Japan and the U.S. And of course there is the political unrest in Indonesia, where president Wahid has been impeached.
In his report Kamman says he sees the growth in Asia remaining flat and possibly dipping over the next quarter, with growth in China’s nascent telecommunications market being the deal breaker. The opportunity there is supposedly enormous, but he notes that there is very little visibility into the market.
”There is a big question mark over whether Asia will hold up over the next few quarters,” said Kamman in a telephone interview. “If it doesn’t, where do we look for renewed growth?”
-- Marguerite Reardon, Senior Editor, Light Reading