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ONI Wins Key Contract

Light Reading
News Analysis
Light Reading
8/18/2000

ONI Systems Corp.'s stock soared yesterday after it announced that it had sealed a multi-year deal to supply metro DWDM equipment to Qwest Communications International Inc. (Nasdaq: Q).

Shares in ONI (Nasdaq: ONIS) climbed 13 percent. The action calmed down somewhat today, with the stock finishing the day at around $110 a share -- up from $95.50 on Wednesday.

On the face of it, the bull-market reaction was disproportionate to the size of the deal. ONI will initially only supply equipment for use in one of the 25 U.S. cities in which Qwest is building out metro networks. And it's not an exclusive agreement; several other vendors -- including Ciena Corp. (Nasdaq: CIEN) -- are also providing the carrier with metro DWDM (dense wavelength-division multiplexing) equipment, says a Qwest spokesperson.

But analysts say that, while the deal may be small, it's still highly significant.

For one thing, although this isn't the first customer announced by ONI, Qwest is an important account. “Qwest is an up-and-comer: Its stamp of approval means a lot,” said Dana Cooperson, director of optical networks at RHK. “This certainly gives ONI an edge over other competitors that haven’t announced deals yet.”

Cooperson adds that the fact that Qwest has not invested in ONI adds further credibility to the deal. If ONI announced a similar deal with Williams Communications Group Inc. (Nasdaq: WCG), another next-generation carrier that has a major investment in ONI, it would not carry as much weight, she says.

Wins such as this one can also make it easier to sell other product lines into the same account, as ONI develops them. “Once they have a foot in the door,” says Cooperson. “it becomes easier to expand that foot print.”

That's already proved to be the case for another DWDM player, Ciena, which started out with a single long-haul DWDM product and now offers a suite of products. In its latest earnings conference call, in which it exceeded analysts' expectations, the company mentioned its role changing from simple point product supplier to a strategic partner supplying multiple solutions (see Ciena Scores Big In Q3).

ONI still faces considerable challenges, however. According to RHK, the metro DWDM market is only expected to be worth a little over a billion dollars by 2003. With large vendors like Nortel Networks Corp. (NYSE/TSE: NT), Lucent Technologies Inc. (NYSE: LU), and Cisco Systems Inc. (Nasdaq: CSCO), along with expanding companies like Ciena and Sycamore Networks Inc. (Nasdaq: SCMR) competing for the same dollars, the position of a newly public company with a standalone metro DWDM product is a bit chancy.

But ONI says it won't be a one-product wonder for too long. "You'll probably see us moving toward the edge to provide an end-to-end wavelength solution," says Bob Jandro, executive VP of sales and marketing for ONI. -- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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