Optical Market Falls Seven Percent

New research from The Dell'Oro Group shows the overall market for optical networking gear fell 7 percent between the second and third quarters of this year -- dipping from a total worldwide market of $5.937 billion to $5.5 billion.

Dell'Oro's research shows that all of the leading vendors contributed to the drop in growth, although some fared worse than others.

Nortel Networks Corp. (NYSE/Toronto: NT), for instance, showed a sizeable reduction in revenue growth compared with the previous quarter. Its revenues grew 34 percent in Q2, but shrank to minus 6 percent in Q3 -- a 40 percent swing.

Alcatel SA (NYSE: ALA: Paris: CGEP:PA) went down 12 percent by the same measure; and Marconi Communications PLC (Nasdaq/London: MONI) showed a 21 percent reduction in growth, quarter to quarter, according to Dell'Oro's estimates.

Among the vendors showing the least change in growth were Lucent Technologies Inc. (NYSE: LU), whose growth rates went down just 4 percent; and Fujitsu Ltd. (KLS: FUJI.KL), which showed just 2 percent less growth than last quarter.

Optical Networking Market Leaders: Revenue Growth 2Q00 - 3Q00 The across-the-board reductions in growth put almost all leading vendors in the negative space when it comes to sequential growth. But there were two notable exceptions: Cisco Systems Inc. (Nasdaq: CSCO) and Ciena Corp. (Nasdaq: CIEN) both continued to show positive growth figures of 25 percent and 17 percent, respectively.

That's not to say these two didn't also suffer a slowup in growth. Compared with Dell'Oro's Q2 figures, Cisco is down 28 percent, and Ciena is down 11 percent in optical equipment growth.

According to the author of the research, Dell'Oro principal analyst Shin Umeda, the overall slowdown can be attributed to the slower growth rates of market leaders Nortel and Lucent. "It pretty well boils down to their third-quarter performance. Both were down sequentially," he says. Since the two vendors own 50 percent of the optical market between them, according to Dell'Oro, that's bound to affect the overall market rates.

But Umeda isn't quick to jump on the alarmist bandwagon that's been circling lately. He says Lucent and Nortel's latest financial results partly reflect normal telecom market fluctuations. "The first and third quarters of any year are lower in revenues in the telecom industry than the second and fourth quarters," he notes. He'll keep an eye on next quarter's numbers, he says, before making any decisive judgements about the overall market.

As for Cisco and Ciena, Umeda attributes their positive (albeit reduced from last quarter) showing to their expansion in the optical arena. "They're smaller players, and their revenue base has gotten bigger over the past two quarters. As they get a bigger percentage of market share, their increases aren't going to show as high," he says.

Other sources say the growth reductions could have something to do with the comparative market demand for different types of optical gear. Dell'Oro's research showed a 5 percent growth reduction in the long-haul DWDM product area and 9 percent for Sonet/SDH gear. But revenues from metro DWDM remained robust, up 37 percent to $108.2 million for the quarter.

"Those [DWDM and Sonet/SDH] markets are on very different trajectories," says Scott Clavenna, president of PointEast Research and director of research at Light Reading. "Companies that don't have Sonet [Ciena] look to be doing much better than those with lots of Sonet [Nortel, Lucent, Fujitsu, Alcatel]."

"Cisco is an odd-ball in this report in that they only sell next-generation SONET. They have yet to show real revenue in DWDM. Others in the report are a mix of SONET, DWDM and hybrids," adds Clavenna.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com

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