Core Optical Startups Chill Out

No doubt about it: The market for core optical switching and transport is the chilliest of all telecom markets, and some high-profile startups are severely cutting back.

In the past couple of weeks, optical-switch startup Calient Networks Inc. and optical transport company PhotonEx Corp. laid off significant portions of their staff.

Experts in the field largely concur that there is no sign of recovery in these markets for possibly years to come -- putting startups in the position of needing to save cash for as long as possible.

”Our view is that the carriers are not going to spend for all-optical switches nor new ultra-long-haul gear, given the capex pressures as well as the oversupply of bandwidth they're currently facing for at least 18 months,” says Fred Wang, a partner with Trinity Ventures, a venture capital firm in Silicon Valley. “The startups in these spaces are toast if they can't make their current cash last for at least another 18 to 24 months, as they're unlikely to raise more venture money.”

Executives from Calient, which makes an all-optical crossconnect (see Optical Crossconnects), would not reveal exactly how many were cut. But sources say that as many as 100 of its 170 employees were let go last week. PhotonEx, a developer of ultra-long-haul DWDM transport gear, laid off 40 percent of its staff this week, bringing its total headcount down to 60 workers, says Kristin Rauschenbach, president and CEO of the company.

These layoffs, along with layoffs from public optical companies like Ciena Corp. (Nasdaq: CIEN), Corvis Corp. (Nasdaq: CORV), Sycamore Networks Inc. (Nasdaq: SCMR), and possibly Tellium Inc. (Nasdaq: TELM) this week, are clear indications that the optical sector has not hit bottom yet -- and that the core market is clearly the weakest of them all (see Ciena to Merge, Shrink, Corvis Sub to Lay Off, Sycamore Reorgs, Lays Off, Teams Up, and Cuts for Tellium?).

Both Calient and PhotonEx have announced successful trials with overseas carriers, but the uncertainty of the market has forced each to batten down its hatches and wait out the storm.

Calient has publicly announced that its product is being tested by two Japanese carriers. But so far, neither carrier has signed a contract or generated substantial revenue for the startup. Most experts agree that photonic switches will ultimately prevail, because they will be cheaper and more flexible than the current optical/electrical solutions. But the issue seems to be in the timing.

“I think there is a strong consensus that photonic switching will be in networks of the future,” says Mike Matthys, vice president of marketing and channels for Calient. “The real question is when will carriers start deploying it. We don’t know yet. We’re hoping it’s sooner rather than later.”

Simon Leopold, an equities analyst with Merrill Lynch & Co. Inc. agrees that all-optical switching will eventually be the technology of choice in the long run, but he says that in the near future carriers are much more focused on getting as much as they can out of their current Sonet infrastructures at the best price they can.

PhotonEx has developed an ultra-long-haul DWDM transport system that runs at 40 Gbit/s. The company announced just yesterday that it has completed a field trial with Deutsche Telekom AG (NYSE: DT) where it transmitted signals over embedded fiber plant on 40 wavelengths at 40 Gbit/s for a total of 1.6 Tbit/s at a distance of 1000 km without regenerating the signal. Impressive stuff, but CEO Rauschenbach acknowledges that it will be a long time before carriers start deploying this kind of gear. She is hopeful that some will deploy as early as 2003, but she recognizes that most deployments won’t happen until 2004.

So far, Calient has raised nearly $300 million, and PhotonEx has raised $179 million, but it’s clear that they will have to make due with what cash they have left, as the venture market has completely dried up for most optical startups.

PhotonEx had 190 employees in October and is now down to 60 after two rounds of cuts. The company also laid off workers back in January (see PhotonEx Axes Staff ). Rauschenbach says these latest cuts came only after talking to customers about deployment timeframes. She says the company needed to make certain it had enough cash to last through 2004. With these latest cuts it should, she says. The sales and customer support teams were the only two groups not affected by the layoffs.

Calient also says that it has enough cash to wait out the crunch. Matthys says the layoffs came about as the company consolidated some of its hardware development groups. The company currently has three facilities: a hardware facility in Santa Barbara, Calif., a software development team in San Jose, Calif., and a MEMS development group in Ithaca, N.Y. As the company waits for the market to pick up, Matthys says it will also be addressing non-carrier markets, including deals with the U.S. government. It is already working with an unnamed systems integrator to bid on projects.

Merrill Lynch’s Leopold says it’s most likely that these companies will partner with a larger company, be bought, or simply fade away. He predicts that once the economy begins to pick up, bigger companies will acquire smaller ones instead of spending money on research and development.

Even smaller public companies are finding it necessary to partner. The recent Sycamore/Siemens AG (NYSE: SI; Frankfurt: SIE) partnership, which was just announced, is a perfect example (see Sycamore Switches Focus). And there will be others, says Leopold. “In a bear market you hibernate,” he says. “But not everyone, especially startups, will be able to do that.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com