Corning Closing on SBC Fiber Deal
The company has supposedly won a large deal to supply fiber to SBC Communications Inc. (NYSE: SBC), pushing out the incumbent vendor Furukawa Electric Co. Ltd. -- formerly Lucent Technologies Inc.'s (NYSE: LU) Optical Fiber Solutions (OFS) -- according to a research note published by equities analyst David A. Jackson, with Morgan Stanley Dean Witter & Co.
Corning has suffered dearly as carriers cut capital spending. In fact, it has probably suffered more than most optical companies, as carriers have especially cut back on fiber deployments due to the fact that their networks are largely overbuilt with fiber. As a result, the company has been forced to cut guidance this quarter (see Corning: 'We've Hit Bottom'). But now it seems as though things might be looking up for the company -- even if it's just a little bit.
And Corning's gain is Furukawa's loss, providing further evidence that the Japanese optical giant may have bought a lemon from Lucent (see Did Furukawa Buy a Lucent Lemon?).
In Jackson's note, he says the deal, which he discovered through sources close to SBC, was won in large part due to Corning's aggressive pricing strategy. He also writes that he believes this new contract should help Corning hit its first-quarter guidance of 10 percent to 15 percent sequential growth in fiber volume and contribute to sequential growth in the second quarter. But he cautions that the bad times may not be completely behind the company.
"Investors may perceive market share gains by Corning in Q2 as firm evidence of a bottom in the fiber market," he writes. "We think it is too early to call a definite bottom to the fiber market."
Jackson estimates that the relationship with SBC could be worth between $60 million and $100 million annually to Corning at current demand levels. He estimates that revenue will come in at $308 million from fiber and cable in the first quarter, up 4 percent sequentially. He has also raised his fiber and cable revenue target for 2002 to $1.29 billion from $1.23 billion.
In general, Corning seems to be benefitting from fiber sales in two areas. First, it is supplying fiber to Sprint North Supply, a division of Sprint Corp. (NYSE: FON) that is laying fiber to service business customers. The second big customer base seems to be cable multiple systems operators (MSOs), which are now having to build out their own networks (see [email protected]: Now in Broadband's Past?).
But there are still many carriers that aren't buying fiber for new network builds and aren't likely to until at least 2003. Interexchange carriers continue to show weak demand for fiber, as more of them have cancelled planned route builds, especially in the last four weeks. RBOC spending on fiber is also way down, as much as 10 percent to 15 percent, according to Jackson's note. On the flip side, RBOCs like SBC will likely begin buying fiber again this year because they are running out of capacity in the metropolitan area networks.
"We believe that RBOC demand for fiber should be driven by fiber exhaust in inter-office metro routes, particularly if DSL deployments and economically sensitive business demand for private line services generate increased metro traffic," he writes.
Still, even with a slight increase in volume sales of optical fiber this year, Jackson says he expects pricing pressure to continue. As an example, he estimates that prices for singlemode fiber have dropped from about $35 per km in 2001 to $20 per km now. In areas like India, where competition is particularly fierce, he believes that that prices have fallen below $20 per km.
While the outlook for this quarter is better than it has been in a long time, potential pitfalls still await Corning. For one, the market could be flooded with dark fiber from failed competitive local exchange carriers. Also, steep declines in pricing of DWDM could hurt fiber rollouts as RBOCs look toward substituting wavelength transport for laying new fiber.
News of the deal didn't influence investors much. The stock closed down $0.06 (0.85%) to $6.96 on Tuesday.
- Marguerite Reardon, Senior Editor, Light Reading