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Optical/IP

Cisco's Optical Customers Face Delays

Cisco Systems Inc. (Nasdaq: CSCO) may be a victim of its own success. The company’s ONS 15454 optical transport platform is projected to do in excess of a billion dollars in business for the company’s optical division this year. But some carriers have been complaining that Cisco has been late with delivering the systems.

Sources at Qwest Communications Corp. (NYSE:Q) say that orders processed at the end of April were delayed. Instead of receiving the line cards in the normal four to six week time frame, they had to wait about eight or nine weeks.

“It was of concern to us because they didn’t let us know they were having problems filling the order,” says one source, who asked to remain unnamed. “I believe the problem was that they couldn’t get the modulators they needed from Lucent.”

But Qwest says that orders placed in June have been delivered on time.

Some analysts say the problem may be more severe.

“Sources have told us that they get the chassis in about 10 weeks, but that they have had to wait up to eight months for their line cards,” says Gina Sockolow, an analyst with Brean Murray & Co. Inc.

Cisco admits that there have been some delays, but it flatly denies that customers have had to wait that long.

“Are you kidding? Someone would have thrown me off a building if they had to wait 36 weeks for their order,” says Carl Russo, group vice-president of optical networking at Cisco.

Russo attributes the lag time to inaccurate forecasting by Cisco itself. He says that the company was unprepared to handle the volume of orders that it has received in the past several months.

“Six months ago we got into an order rate that was unanticipated," says Russo. "We’ve been doing very well catching up, but we are working to do better. Our lead times have been longer than we would like, but our goal is to be able to ship in days instead of weeks. We’re not there yet, but we’re working on it.”

“Components are just not the issue,” adds Russo. “The major issue is, even though we anticipated very fast growth, our forecasts were off. And it’s not as simple as picking up the phone and saying to our suppliers, ‘Hey, I need a bunch more of these components tomorrow.’ Is that really a shortage? No, that is a result of us not forecasting and gauging our needs from the supply chain.”

Other carriers say they have experienced some delay. Although officials at Williams Communications Group (NYSE: WCG) would not speak specifically about Cisco, the carrier did say that it has experienced supply problems with that class of device, which includes products sold by Nortel Networks Corp. (NYSE/Toronto: NT) and Redback Networks Inc. (Nasdaq: RBAK) as well as Cisco. The carrier admits that it had to wait as much as three months for line cards to be delivered for its systems, says Chris Hamilton, chief technologist with Williams.

“Some acquisitions that were made earlier had impacted timelines for vendors getting components to build equipment,” says Hamilton. “But currently those industry players are within the normal shipping time, and we haven’t experienced any delay in rollout.”

Cisco says it has a three-pronged strategy for dealing with the issue. First it is investing in a number of component companies and forming partnerships with these vendors (see Cisco's Components Feast). Secondly, it is expanding its internal manufacturing capabilities. In fact, tomorrow the company is announcing its plan for a new 674,000-square-foot facility in New Hampshire near its Chelmsford, Mass., campus (see Cisco Unveils Manufacturing Strategy). The third part of the strategy entails keeping a stockpile of components on reserve for a spike in demand.

“This isn’t to say that we are going to be making excess finished goods,” says Russo. “Having extra inventory will allow us to run a leaner manufacturing operation.”

Component supply issues may also be affecting the company in other areas as well. In the company’s 10-K quarterly report filed with the Securities and Exchange Commission on Friday, it cited a $3.83 billion backlog, compared with a backlog of approximately $922 million for the same time period the previous year. Analysts have speculated that this large backlog could be caused by component shortages.

Russo says that to his knowledge the optical division is not a significant contributor to this backlog.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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