Ciena's BT Coup: How Big?
The value of the three-year deal wasn't provided, but it places Ciena in the role of "a strategic supplier of optical transport and switching equipment and network management software," according to Ciena's press release (see Ciena Scores With BT).
Ciena says its LightWorks architecture has been selected for live deployment in next-generation networking rollouts at BT. Products included on the approved list include Ciena's CoreDirector, CoreStream, Online Metro, Online Edge, MetroDirector K2, and OnCenter Management System.
On the face of it, big news for Ciena -- and a major blow for Marconi plc (Nasdaq/London: MONI), which in the past has made a big thing out of its monster contract with BT to supply optical gear, a deal that extends through 2006 (see Marconi wins $3+ Billion Contract and Marconi to Supply BT Network).
But on closer inspection, the deal may not exactly be all that. For one thing, BT's playing it down. No figure has been given for what BT will buy from Ciena, and this contract is no guarantee of any sales. Rather, according to BT spokesman David Orr, the agreement means Ciena's gear has made it onto BT's approved list of suppliers, along with several others with similar "framework" agreements, including LM Ericsson (Nasdaq: ERICY), Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Marconi.
"There's nothing exclusive about this agreement," Orr says. "It's not unusual."
Further, while Ciena and BT agree that Ciena's in line to help supply BT's next-generation network, Orr won't say what that means. Like any other carrier, BT upgrades and maintains its network regularly, he says, so no biggie if Ciena's on the list of many whose gear may be used for the purpose.
The jury's also out on whether the deal is truly a blow to Marconi, which for the past couple of quarters has earned about 20 percent of its revenues from BT sales, particularly in the SDH arena, where Ciena isn't a major player. What's more, Marconi has downplayed the role of DWDM on future networks (see Mike Parton, Marconi), indicating that it's not a key area for Marconi anyway.
"We remain a strategic supplier to BT in core optical transmission and other parts of its business," says Marconi spokesman Joe Kelly.
Analysts think the deal may be a nudge to Marconi. "This may be an insurance policy for BT," says Sam Greenholtz, principal at Telecom Pragmatics Inc., a consultancy. He says BT continues to think highly of Marconi, according to his sources, but the carrier has reservations about relying so heavily on it, given its continued restructuring. What's more, Marconi may not be able to offer a low enough price to BT, spurring a hardball play.
BT's Orr says price is always an issue in choosing a vendor, as is product quality and the ability to deliver and support products.
Not surprisingly, Ciena's quite hyped about the deal. Spokesman Denny Bilter says Ciena's been working with BT on this for awhile, and that the agreement is for live deployment in the carrier's network, which should result in revenues in Ciena's fourth fiscal quarter that starts in August.
Financial analysts seem divided. "I think this is a very big announcement," says Timm Bechter, broadband equipment analyst at Legg Mason Inc. It will have a major influence on other incumbent carriers that may be considering Ciena, he thinks, particularly since BT is interested in a range of Ciena products.
Bechter calculates the deal to be worth "no less than $160 million," based on what sources have told him of other Ciena deals. He's modeling for revenues to come from the deal in 2004, but thinks there's a fairly good chance they might show later this year.
Others are far less bullish. "In the current environment, any positive news is material. Is it big? Yes. Is it a positive step? Absolutely. Is it big enough to make a difference? No," asserts Steven Levy of Lehman Brothers. "Ciena is still two and half years away from profitability. I mean, we're talking about a company with a $700 million breakeven point." He maintains Ciena will need "a few more" wins like this to make a big dent.
Still, Levy concedes the win proves that Ciena's strategy to target big incumbent suppliers worldwide is working. It's nice for Ciena to add BT to a roster that includes AT&T Corp. (NYSE: T) and Teléfonos de México. And he says it will no doubt help make other incumbents sit up and take notice.
"Incumbents like to look at companies and say where else you are installed," he says.
The deal has been the subject of rumors circulating on Light Reading's message board since Ciena reported its last financial results in February (see Ciena: 'Flat to Up' and, in particular, this message). However, Light Reading was unable to substantiate the rumors at the time.
—Mary Jander, Senior Editor, and Peter Heywood, Founding Editor, Light Reading