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ONI's Secret Weapon

Light Reading
News Analysis
Light Reading
2/16/2001
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SAN JOSE, Calif. -- During a week in which snow coated the tops of the surrounding mountains, there was no doubt that ONI Systems Inc. (Nasdaq: ONIS) was generating some heat down in Silicon Valley.

Last week, the company blew out earnings expectations and increased future revenue guidance (see ONI Beats Estimates, Boosts Guidance). This week, ONI extended its product line, buying interface technology from Finisar Corp. (Nasdaq: FNSR) and announcing software that will enable customers to provision their own optical circuits (see ONI Systems Buys Finisar Folly and ONI Offers OPTX Portal Package). In short, the recently public company is ascending, as some of its startup peers are slipping and sliding. Light Reading made a visit to ONI Systems this week to find out what's making this company tick.

For one, there's CEO Hugh Martin, an energetic talker and former Kleiner Perkins Caufield & Byers entrepreneur-in-residence who bounces around a glass-walled office framed with drawings of yachts. Martin's vision is a practical one targeted at extending the edge of optical networks to enterprise networks. He believes metropolitan optical technologies will open up new opportunities for corporations to use wavelengths for bandwidth-thirsty applications such as storage area networks. (Milking the SAN market is the trend du jour amongst optical networking vendors and VCs -- see Shedding Darwin on Light.)

"Joe Nacchio [the CEO of Qwest Communications International Corp. (NYSE: Q)] says the biggest opportunity is in delivering fiber to the enterprise," says Martin. "If all you're doing is fiber relief, it's not a big market."

Then there's the box. Metro DWDM (dense wavelength-division multiplexing) is a hot market, but there's certainly no shortage of players. What is it about ONI's approach that can separate it from the crowd? It's clear that the protection and provisioning features make ONI's DWDM system more interesting. In addition to offering plain vanilla DWDM channels, the nodes can be strung together in rings and offer protected channels with 50 millisecond restoration -- essential for the mission-critical telecom market. In other words, ONI delivers DWDM efficiency with Sonet-like reliablity.

But after digging deeper into ONI, the key to driving its next stage of growth may be the company's state-of-the-art manufacturing and testing system. As it matures and gets tied to Wall Street's brutal quarterly demands, manufacturing and inventory control will become the most important element of success.

That's where a Canadian, Alain Leclerc, fits in. Leclerc formerly worked at Nortel Networks Corp. (NYSE/Toronto: NT), where he directed the manufacturing of the company's now-famous OC192 line.

The defection of Nortel employees such as Leclerc is part of the ongoing legal battles between Nortel and ONI (see Nortel Sues ONI and ONI Strikes Back ). From the looks of it, Nortel has reason to be concerned.

Leclerc said he left Nortel because he was ready to do the startup thing. "I wanted to go somewhere and start from scratch," he said, "I could do some different things here that I couldn't do at Nortel. Virtual manufacturing is unique to ONI. There is also the climate, moving from snow to sand, and the potential to put some money in the bank."

How unique is Leclerc's manufacturing system? Hard to pin down. But ONI's peers have definitely noticed.

"I think it's unique in the way they integrate everything together," says Bart Shigemura, CEO and president of Alidian Networks Inc., who is familiar with ONI's technique. "The manufacturing, operations, and testing is all integrated, and when the product comes off the line the customer signs and they can declare revenue right way." ONI's manufacturing line was indeed humming along during the Light Reading visit, with dozens of cards plugged into computer-driven tests and a couple dozen entire systems stacked on trollies headed for the loading dock.

Leclerc's "virtual manufacturing" system ties the company electronically with its contract manufacturers and suppliers, which include JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), iPhotonics Inc., and Pemstar Inc. (Nasdaq: PMTR). Leclerc and others in ONI manufacturing are able to monitor, in real time, the manufacturing of their subsystems and components at their partners' facilities. This includes getting live updates of the yields on the production line. The companies are also connected by Webcam so they can engage in live videoconferencing to debug problems in the assembly process.

"I can monitor the yields and all their measurements," says Leclerc. "All of our data is going into the same database. So I can do all of the analysis as if it were happening at ONI."

This process is important because it has led to a close relationship with JDSU, which is just down the street. JDSU integrates a number of small switch assemblies for ONI, which are manufactured as subsystems. ONI can sync up the deliver of the subsystems with its own manufacturing process by monitoring JDSU's yields online.

It may be products and early customer success that drove a company such as ONI to IPO. But it's the manufacturing system that drives a company past the tweezer and microscope stage and wins Wall Street approval. In the last few quarters, at least, that appears to be central to the ONI story. Does this mean that ONI's got the metropolitan optical market locked up? Certainly not. Although Martin is quick to preach the benefits of DWDM versus Sonet, next-generation Sonet boxes -- such as those from Cisco Systems Inc. (Nasdaq: CSCO) and Redback Networks Inc. (Nasdaq: RBAK) -- are selling well. And large, well-funded companies addressing the core switching market, including Ciena Corp. (Nasdaq: CIEN) and Sycamore Networks Inc. (Nasdaq: SCMR), are aggressively pursuing the metro DWDM market.

There are also several startups working on more sophisticated DWDM systems with dynamic bandwidth provisioning. But in the meantime, with the door to the IPO market shut, ONI Systems has some time to enjoy its early lead. -- R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

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birdieking
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birdieking,
User Rank: Light Beer
12/4/2012 | 8:52:56 PM
re: ONI's Secret Weapon
I would not be so bullish about ONI, for such a small company they are taking a big risk investing the amount of money they have in manufacturing and services. One bad quarter and the street will string them up and demand cost cutting! In addition, I would be concerned if I were an ONI customer about their ability to scale manufacturing on a global level. The companies that preserve cash flow and invest in outsourced solutions will have a much better position to react to market conditions good or bad.

One other note, I hear on the street that ONI is an arrogant company and their customer base is not impressed.
prefer_to_lurk
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prefer_to_lurk,
User Rank: Light Beer
12/4/2012 | 8:52:44 PM
re: ONI's Secret Weapon

Instead of making comments like "from the looks of it, Nortel has reason to be concerned", why don't you present actual market share data ?

The OPTera Metro 5200 (which Nortel acquired a few years back from Cambrian), has been crushing ONI in published market share figures -- although ONI and Nortel are currently running neck-and-neck for new Metro DWDM business. It's virtually a two-horse race right now and you don't even mention the OM 5200 ? What's up with that ?

Can you even explain what the perceived benefits of the ONI solution are ? Why exactly should Nortel be concerned -- you sort of failed to elaborate on that.

Less hype, more substance would be appreciated.

prefer_to_lurk

opticalwatcher
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opticalwatcher,
User Rank: Light Beer
12/4/2012 | 8:52:44 PM
re: ONI's Secret Weapon
Birdieking thinks that they can't scale because they don't outsource. From the article it sounds like they -are- outsourcing:
"Leclerc and others in ONI manufacturing are
able to monitor, in real time, the manufacturing of their subsystems and components at their partners' facilities"
Isn't this the point of the whole article?
xinotohp
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xinotohp,
User Rank: Light Beer
12/4/2012 | 8:52:43 PM
re: ONI's Secret Weapon

>Can you even explain what the perceived benefits >of the ONI solution are ? Why exactly should >Nortel be concerned -- you sort of failed to >elaborate on that.

From ONI's earnings call: Optical BLSR protection, dynamic power management and optical services provisioning are some of the key product differentiators.

wOOp
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wOOp,
User Rank: Light Beer
12/4/2012 | 8:52:38 PM
re: ONI's Secret Weapon
What is the big deal about monitoring data from
vendors? What is the big deal about an
automated test fixture? Companies have
been doing this for years.

Nothing in this article describes anything
remotely new.

I guess the author was wined and dined by ONI
so he feels obligated to say something nice.
mike38
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mike38,
User Rank: Light Beer
12/4/2012 | 8:52:36 PM
re: ONI's Secret Weapon
this is why NT is getting crushed and what this story is all about ...

ONI is all about EXECUTION !!


Steve Saunders
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Steve Saunders,
User Rank: Blogger
12/4/2012 | 8:52:35 PM
re: ONI's Secret Weapon
Woop,

This is an interesting message.

Recently Light Reading has been getting a lot of messages complaining that our coverage is too negative. And that our coverage of Kleiner Perkins companies is *especially* negative.

Yet here's a positive story (about a KP company) based on an on-site visit, and we've already started getting messages, like yours, that it's too positive!

Damned if we do, damned if we don't?

Best,

Steve
Strider
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Strider,
User Rank: Light Beer
12/4/2012 | 8:52:34 PM
re: ONI's Secret Weapon
Steve,

Don't worry about the disgruntled birdieking and wOOp. My guess is that they are in one of the four following situations:

1. They work for a start-up that is not delivering technology on the planned schedule and blame manufacturing for burning through all the cash in preparation for the huge demand that was communicated by marketing and product development a year earlier. Guess what folks, you don't get many chances to succeed in a start-up. I would rather make appropriate infrastructure investments in the company (and see it succeed or die quickly) than watch the company die a slow death through lay-offs, pure panic engineering, and deceit of investors and customers.

2. They have delivered products that have been designed for a sixth grade science fair and can never be manufactured at volumes that will generate a profit. (no offense intended to the very capable sixth graders of the world)

3. ONI is blowing their products out of the water.

and/or

4. They've spent their careers with large companies who've invested many man years and billions of dollars in manufacturing to get to the capability ONI has achieved in a very short time.

Get real folks. There's a reason that the optical market has cratered; very few companies out their are capable of manufacturing a product at volume, cost and performance (reliably). As a result companies have built up huge inventories due to component shortages, invested heavily in off-shore, labor intensive foundaries and/or discovered that the 'major' players in the industry won't touch their products since they can't demonstrate the ability to build more than prototype volumes. Outsourcing and foundaries are only relevant when you've got a mature industry that is driven exclusively by cost and efficiency. (such as PCB's) Go check out any of the major contract manufacturers and you'll find that they are scrambling to acquire fiber optic capability and realizing it's not as trivial as resistors and capacitors.

Thank you for an enlightening article, Light Reading. It's refreshing to read about something with substance rather than hype.

prefer_to_lurk
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prefer_to_lurk,
User Rank: Light Beer
12/4/2012 | 8:52:33 PM
re: ONI's Secret Weapon
"...this is why NT is getting crushed..."

Wow ! That's an interesting take on things.

Here's another, as per Dell'Oro 3Q'00 rankings of Metro DWDM market share:

#1 - Nortel 53%
#2 - Ciena 24%
#3 - ONI 15%

This is called data -- as opposed to hype.

prefer_to_lurk
terence
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terence,
User Rank: Light Beer
12/4/2012 | 8:52:33 PM
re: ONI's Secret Weapon
God I hated working at this company. The entire top part of the company was populated with mediocre managers who spent ALL of their time shooting at each other.

There is no peace at that company.
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