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Optical/IP

Optical: Cisco's Odd Man Out?

Is Cisco Systems Inc. (Nasdaq: CSCO) getting out of the optical networking business?

Press reports in northern California say 40 staff in Petaluma were being moved out of optical, many of them being offered other jobs within Cisco. One source says Cisco's Richardson, Texas, facility is also slashing optical jobs and giving several employees new assignments.

And, like last year, there are rumors that Cisco is close to declaring the 15000 series products have reached "end of life." But, as ever, analysts and competitors seriously doubt that's going to happen.

"I'd be hard pressed to believe they'd be completely cutting out the 15454," says Joe Chiasson, an analyst with Susquehanna Financial Group . Yes, the architecture is several years old, but "typically those products throw off a lot of cash when they get that late in the life cycle," he says.

The 15200 and 15600 products are a different story, though, as both would be tempting targets for pruning, Chiasson says.

Cisco wouldn't comment on any layoffs or the status of its flagship optical networking product lines. The company instead offered this boilerplate:

"As a normal course of business, Cisco continually reviews its operations to achieve the greatest focus on growth opportunities, customer satisfaction and productivity gains. As this occurs, we also evaluate resources to ensure that they are aligned with the highest priority work designed to address our customers’ needs," the Cisco statement reads.

That's not exactly an endorsement, is it?

One source says Infosys Technologies Ltd. (Nasdaq: INFY) is now doing all the engineering upkeep for the 15454 system -- a sign that it's not dead; Cisco's just trying to wring costs out of it. Infosys representatives could not be reached immediately for comment.

In February, Cisco did tell Light Reading there had been "tremendous investment" in the 15454 during the past two months, and the company has continued upgrading the 15454's software. (See Cisco Denies Optical Slowdown and Cisco Bolsters Its MSTP .)

But analysts have wondered for some time whether Cisco is losing its appetite for optical transport.

A year ago, Cisco restructured its optical division, tucking it under the wing of the broadband business unit and reassigning some staff. Veteran executives Surya Panditi, formerly of Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) and Polaris, was brought on to oversee the unit, with Ajaib Bhadare, formerly of Cerent, given the reins of optical. (See Cisco Swaps Opto Jobs, Former Avici CEO Joins Cisco, and Cisco Taps Cerent Vet.)

Cisco also started hiding its optical revenues, splitting them up among the routing, switching, and "other" categories in its financial reporting. (See Cisco Rallies in Q2, Hides Optical.) One problem with optical is that Cisco doesn't have a realistic shot at being No. 1 or 2 in the market, a goal CEO John Chambers says he sets for all of Cisco's product lines. In a widely fragmented optical market, Cisco lags behind competitors including Nortel Networks Ltd. and, assuming the merger is completed, the combination of Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU).

Cisco's MSPP (multiservice provisioning platform) market share was just less than 10 percent during the first half of 2006, according to figures from the Dell'Oro Group . That put the company sixth in a fragmented market where no single vendor topped 16 percent market share. Despite the fragmented nature of optical, Cisco hasn't come out on top in MSPPs (or in WDM systems, where its situation is similar). Even if it did, it seems unlikely that the company could build any kind of commanding lead.

In North America, MSPP business is fading as interest in Sonet/SDH wanes. MSPPs were made for carrying disparate traffic types on Sonet/SDH networks -- but carriers are moving toward a more packet-based network. That's led to the demise of companies such as White Rock, pieces of which ended up at Turin Networks Inc. (See White Rock Got Rocked and As the World Turins.)

Moreover, Chambers has said Cisco wants to decrease its investment in TDM technology -- and while the 15454 has been outfitted with packet interfaces, it still comes from a Sonet/SDH legacy.

A sale of the optical business is certainly possible, but analysts and competitors are hard pressed to come up with a likely buyer. Asian companies might be the best bet, some say.

Whatever happens to the 15000 lines, Cisco is likely to keep a foot in optical in the form of IP-over-DWDM, where routers get outfitted with DWDM interfaces, analysts say. (See Cisco's CRS-1 Goes Optical.)

— Craig Matsumoto, Senior Editor, Light Reading

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SolitonWave 12/5/2012 | 3:36:04 AM
re: Optical: Cisco's Odd Man Out? It's true that the optical network market is crowded and fragmented but the fact is: after several years of trouble it seems to be growing now... Also interesting to notice that the MSPP/NextGen-SDH market still represents a significant slice of the optical cake (over 60% in 2005)... On the other hand, both Metro and long-haul WDM markets are expected to show double-digit growth in the coming years.
For Cisco to have a dominant position they would have to buy... The option is to sell or close...
twill009 12/5/2012 | 3:36:01 AM
re: Optical: Cisco's Odd Man Out? LR, this is the kind of story you should do more of -- take an emerging factoid and wrap it in context. All the more interesting because at one point the Cerent platform was the hottest box at Cisco. I think the Monterey stuff has been problematic since Day One.

One thing to add is perhaps a fuller description of the platforms that have surpassed the Cisco gear.
jhonsk 12/5/2012 | 3:35:59 AM
re: Optical: Cisco's Odd Man Out? Yeah the Article helps consolidates the belief that Cisco top boss is planning a pullout from the Optical MSPP tx . Unless there is a major Buyout the segment could prove to be a drag cor the company . Look Out TELLABS !!
^Eagle^ 12/5/2012 | 3:35:58 AM
re: Optical: Cisco's Odd Man Out? LR, I would like to see some additional analysis on the Optical group at Cisco. Particularly on the returns generated by the buyout of Cerent and Monterrey and Pirelli.

Broken down by each company. For instance, of the billions spend on the Cerent buy, did the sales of the 15454 ever make Cisco any REAL money? By REAL, I mean actual profit after all costs are taken into consideration: cost to build product, sell product, all overheads, etc.

What do you think the total NET bottom line for the Cerent buy would be for the duration of Cisco's ownership? I know they sold a lot of them, but did they ever make money from those sales? both on a per box basis (top line) and bottom line bases as well.

They would have needed to have sold a lot of boxes to cover a multi-billion dollar purchase plus ongoing burn rate in Petaluma. Same is true for Monterey and for Pirelli.

an analysis like this would make for a very interesting article.

How about a little investigative journalism?

Sailboat
twill009 12/5/2012 | 3:35:55 AM
re: Optical: Cisco's Odd Man Out? If i recall correctly, Cisco used stock, not cash to do the deals. Since its stock was massively inflated at the time, the present value cost of the buyout is a faction of what they paid for it at the time.

I'm not defending the deal, but revisiting one example of the crazed economics of the bubble is not very newsworthy. Even though Cerent was probably Cisco's biggest deal of the bubble, probably companies like JDSU and AOL-Time Warner did bigger and more foolhardy deals.

Maybe that is a better subject for entertaining analysis: which deal was objectively the biggest failure of the bubble? My nomination: Intel's purchase of Giga for over $1 billion -- in cash!
Pete Baldwin 12/5/2012 | 3:35:55 AM
re: Optical: Cisco's Odd Man Out? Cerent was definitely stock and I'm 90% sure Monterey was too. Can't recall the Pirelli deal but given the time, it was probably stock.

Has anyone seen, for any sector of business a study along the lines of what Sailboat describes? It's an intriguing question -- was Cerent "worth it"? -- but it seems like the "Worth" would be tricky to pin down in an all-stock deal. I'm curious if it's been studied in other cases.

Giga for $1 billion cash -- now that one's easy. Ow.
ron202 12/5/2012 | 3:35:54 AM
re: Optical: Cisco's Odd Man Out? One difference w/ GiGA vs. some other deals - they were shipping product

well if I recall Cerent was shipping product and Pirelli was shipping product also.
By the way what happened with Pirelli? Are they still part of Cisco ?
bwoodruff 12/5/2012 | 3:35:54 AM
re: Optical: Cisco's Odd Man Out? One difference w/ GiGA vs. some other deals - they were shipping product.

Forget all this NPV and ROI stuff for the analysis. In those days, the question wasn't good biz, the question was stock price. In most of these deals, the market cap of the acquirirng company went up after the deal, so it was a good deal. QED.

And $1.25B for GiGA? Seemed fair to me ;-)
chook0 12/5/2012 | 3:35:53 AM
re: Optical: Cisco's Odd Man Out? -----------------------
well if I recall Cerent was shipping product and Pirelli was shipping product also.
By the way what happened with Pirelli? Are they still part of Cisco ?
--------------------------

As I recall, Cisco did not buy Pirelli. They just bought the DWDM business from Pirelli.

I also seem to recall seeing somewhere that Pirelli brought out a new line of DWDM gear some time later, but this would need to be checked....

--chook
numinary 12/5/2012 | 3:35:51 AM
re: Optical: Cisco's Odd Man Out? ==========
-----------------------
well if I recall Cerent was shipping product and Pirelli was shipping product also.
By the way what happened with Pirelli? Are they still part of Cisco ?
--------------------------

As I recall, Cisco did not buy Pirelli. They just bought the DWDM business from Pirelli.

I also seem to recall seeing somewhere that Pirelli brought out a new line of DWDM gear some time later, but this would need to be checked....
===================

http://www.pirellibroadband.co...
scroll to the bottom for their metro CWDM "subsystem". given that there are DWDM components just above this system it is not much of a leap to assume that a DWDM system is also in existence
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