Ciena's Optical Switch Fiesta
“The value is tough to qualify, but this is definitely good news for these guys,” said Rick Schafer, an analyst with CIBC World Markets. “Everybody in telecom is scrambling to find stability on the top line. Ciena, Tellabs, they’re all really beating bushes to find business.”
The news about Telmex was expected: analysts such as Simon Leopold from Merrill Lynch & Co. Inc. say they have already baked the figures into their models. Deployments of Ciena’s gear have already begun, but the company says it likely won’t book revenue on any of it until Q4 of this year.
Still, the win is noteworthy for a couple of reasons. For one, Telmex is the number-one carrier in Mexico and is considered one of the healthiest telecoms in the world -- it is essentially the national phone company of Mexico. Gary Smith, Ciena's CEO, stated a few months ago that Ciena was going to focus on winning incumbent business. This win, in addition to the AT&T Corp. (NYSE: T) contract announced in February, are examples of this strategy at work.
Second, the contract is specifically for Ciena’s optical switching products. This is a major shift from what incumbents in the U.S. have been buying from the company. BellSouth Corp. (NYSE: BLS) and Verizon Communications Inc. (NYSE: VZ), both Ciena customers, have only bought optical transport gear from Ciena so far. The Qwest Communications International Inc. (NYSE: Q) contract, which was signed in 2000, also started out as a transport win but has evolved to include some switching products. Until Telmex, AT&T was the only incumbent carrier building a next-generation optical network with Ciena’s gear. In fact, the Telmex network is supposed to be very similar in scope to that of AT&T, says Leopold. Furthermore, this news validates Leopold’s thesis that roughly 50 percent of Ciena’s sales will soon come from optical switching.
The Telmex deal also highlights a trend toward border-hopping. The international market for optical transport and switching looks much better for business than North America's does, at least for this year, say analysts. Interexchange carriers such as Sprint Corp. (NYSE: FON), WorldCom Inc. (Nasdaq: WCOM), and AT&T Corp. (NYSE: T) already have too much capacity in their networks. These carriers are also loaded with debt and are likely to cut capital spending yet again this year. On the other hand, the regional Bell operating companies (RBOCs) have plenty of money, but they aren’t ready to deploy new technology. Analysts don’t expect them to start deploying optical switching until 2003 at the earliest.
“I think there is dark cloud over North America,” says CIBC’s Schafer. “China and other international markets are going to be where most of the action is this year.”
Ciena isn’t the only telecom equipment company to announce new contracts recently. Juniper Networks Inc. (Nasdaq: JNPR) and Cisco Systems Inc. (Nasdaq: CSCO) have both recently announced contract wins for their core routing gear (see COLT Deutschland Picks Cisco and Juniper Wins in China, Europe). Service providers like Yipes Communications Inc. are coming out of bankruptcy ready to do battle (see Yipes Reborn – Amid Accusations. And others such as Level 3 Communications Inc. (Nasdaq: LVLT) are getting cash infusions to keep them afloat (see Buffett Boosts Level 3). But analysts say not to get too excited.
“Are things turning around?” said Merrill Lynch’s Leopold. “Right now I don’t see enough indicators to suggest that we are coming off a bottom. I want to be able to say yes, but this isn’t over yet.”
Ciena’s stock was up 0.38 (7.97%) to $5.15 today.
— Marguerite Reardon, Senior Editor, Light Reading