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Optical/IP

Qwest and Tellium Revise Contract

Late last week, Tellium Inc. (Nasdaq: TELM) filed an 8K form with the Securities and Exchange Commission stating revised terms to its $400 million contract with Qwest Communications International Inc. (NYSE: Q). While the amount of the deal hasn’t been changed, the timing of the revenue and the terms for ending the contract have been.

Analysts covering the company remain bullish on Tellium’s short-term prospects, but the newly amended agreement leaves many long-term questions still unanswered.

The original contract, established in September 2000, called for Qwest to purchase $300 million worth of equipment within three years. In May 2001, the agreement was extended for another $100 million, to be spent between 2003 and 2005.

According to the amended contract, Qwest has agreed to buy $100 million worth of equipment by mid 2002. Qwest has already purchased roughly $30 million worth of equipment in 2001, and it is slated to buy another $50 million worth in the first quarter of 2002, according to a Qwest spokesperson.

In the short term this is good news for Tellium, since it gives the company and its investors more visibility into revenue for the next quarter. Revenues for Q1 2002 are expected to be about $55.9 million, according to estimates from Morgan Stanley Dean Witter & Co. The Qwest purchases alone would cover most of this revenue.

Also as part of the deal, Qwest agreed to terminate and “give back” 1.38 million warrants issued by Tellium. As a result, Tellium will take a one-time charge of $19 million in the quarter ending December 31, 2001.

But there is one hitch. Qwest now has the right to terminate the contract at any point for any reason. The new $50 million purchase order could be the last from Qwest, since the company is not obligated to finish out the terms of the original contract. This applies not only to Qwest's long-term purchasing plans but also to the remainder of its shorter-term $100 million commitment.

“Any such notice shall state the new Termination Date and may or may not include any reasons for the election. No such election(s) shall be subject to review, modification or change by any court, arbitrator, governmental body or other person. Qwest shall have no liability whatsoever to any Supplier or any other person with respect to any such election(s),” says the 8K form filed with the SEC. Still, Harry Carr, chairman and CEO of Tellium, says that revised deal is a “win-win” situation for both Tellium and Qwest.

“The bottom line is we have given Qwest more flexibility over the long term,” he says. “And what we’ve gotten in return is more visibility in the short term. And that’s why we think this is a win- win deal.”

Better a partridge in the hand than two turtle doves in the bush, it seems, but the news has left some analysts a bit skeptical about Tellium’s long-term potential, especially in light of Qwest's recent announcement that it would be cutting capital spending again (see What's Behind Qwest's Numbers?).

“I have said in the past that I think there are pockets of dissatisfaction with the relationship at Qwest,” says Kevin Slocum, an analyst with Wit Soundview. “This is an attempt to put it on more even ground and, because of that, it puts the favor of the relationship back toward Qwest.”

At least for the next quarter, Tellium looks as though it will make its stated guidance. But the long-term future is less certain. The remainder of the Qwest contract is likely to be filled with Tellium’s Aurora Full Spectrum, an all-optical switch still in development. The new switch isn’t expected to hit the market until at least 2003, which could mean that aside from the early purchases in 2001, Qwest could be a weaker customer until the Aurora Full Spectrum begins shipping.

In the meantime, Tellium needs to beef up its customer pool. Dynegy Inc. (NYSE: DYN), which accounted for a large portion of revenue this year, will likely not spend as much in the coming year. Cable & Wireless PLC (NYSE: CWP) has also pushed off purchases indefinitely (see Ciena Wins C&W Deal).

What’s more, Tellium had promised to announce a new customer by the end of the year. Now, that too has been pushed out until early next year. The two likely candidates are Deutsche Telekom AG (NYSE: DT) and WorldCom Inc. (Nasdaq: WCOM). But both are reportedly also looking at gear from competitors. Deutsche Telekom is supposedly looking at Lucent Technologies Inc. (NYSE: LU) products. WorldCom is currently a big Nortel Networks Corp. (NYSE/Toronto: NT) customer.

But some analysts remain optimistic. “We believe Tellium’s visibility remains relatively healthy, despite the delay in a customer announcement and continued deceleration in carrier capex,” says a Morgan Stanley research note published last Friday. “We note that Tellium is the only equipment vendor in our universe that has provided 2002 revenue guidance and that purchase agreements with Qwest provide solid visibility into 1Q 2002.”

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com
raman 12/4/2012 | 7:22:48 PM
re: Qwest and Tellium Revise Contract OG wrote: I thought that the path monitoring and
fast switching was done in the ASIC/firmware and
that network setup/provisioning, etc and monitoring was done at the software level (network
management type applications, as opposed to ASIC
and associated firmware).
=============

I stopped writing code a few years ago- so this may be stone age info considering how fast techlonogy is changing;-)

To do 50ms switch- both real-time s/w and firmware in FPGA/ASIC are involved.

S/w keeps track of all connections in its data structures.

When a LOS or some other problem is reported by hardware- the S/w looks at available resources and tells the ASICs to switch the connection.

So both s/w and f/w are involved in doing the 50ms switch successfully and quickly. s/w to do the book-keeping of system resources, and ASIC to actually do the switch.






boson3 12/4/2012 | 7:22:49 PM
re: Qwest and Tellium Revise Contract I have to agree with RadioGooGoo. Software can be loaded into ROM or NVRAM or embedded in a chip.
optical_guy 12/4/2012 | 7:22:52 PM
re: Qwest and Tellium Revise Contract Guys/gals?? - this is getting a little out of my realm of knowledge, so please excuse me if I write something real stupid.

I appreciate wdogs explanation of what this type of grooming/edge switch does...but this was not unknown to me or the heart of my question.

With what little knowledge that I have on this type of equipment, I thought that the path monitoring and fast switching was done in the ASIC/firmware and that network setup/provisioning, etc and monitoring was done at the software level (network management type applications, as opposed to ASIC and associated firmware).

I am very open to being educated in the architecture and functional partitioning of these type of systems. Anybody?

Thanks

OG
RadioGooGoo 12/4/2012 | 7:22:53 PM
re: Qwest and Tellium Revise Contract "It takes a lot of excellent, well written software to make all of this happen in a real network environment. A few ASICs don't make a system, it's robust software that makes all the difference." wdog

Aren't you and OG talking about the same thing? A system can theoretically run purely on ASIC or software; you don't have to have both but a combination of both is ideal. The difference is that it is much easier to upgrade the software, whereas the ASIC is much more robust. Not all ASIC and software is the same (duh!) so it is essential that both were well-written for a system to function efficiently...

wdog 12/4/2012 | 7:22:54 PM
re: Qwest and Tellium Revise Contract "wdog - I am willing to stand corrected....care to elaborate?

OG"


The value of an STS-1 grooming switch is that the switch can transport and manage traffic at the individual service level. An STS-1 equals a T3 service, the most common transport service sold by carriers. To provision, manage, and offer SLAs at the service level, carriers need a device, this case a grooming switch, which can manage and protect at the service level or in SONET terms at the path level. A grooming switch with 256 ports of OC-48 must have the capability to manage and protect over 12,000 individual STS-1 services in real time. This requires a control system than can monitor each service, detect a problem, make and execute a protection switch all with 50ms. This requires an excellent real-time software system. A common test for a carrier to perform on a switch is to fail 1/3 of the ports on a fully populated switch and measure that all of the services are corrected protection switched in the required 50ms and that all of the alarms generated by this massive failure are accurately reported and then cleared by the management system after the problem has been corrected. It takes a lot of excellent, well written software to make all of this happen in a real network environment. A few ASICs don't make a system, it's robust software that makes all the difference.
Litewave 12/4/2012 | 7:22:54 PM
re: Qwest and Tellium Revise Contract Author: wdog
problem has been corrected. It takes a lot of excellent, well written software to make all of this happen in a real network environment. A few ASICs don't make a system, it's robust software that makes all the difference.


This is precisely why push-comes-to-shove, CIEN always beats SCMR & TELM where it counts - live network trails - the Core Director consistently outperforms its competition.

This is also precicely why the HDX will inevitably fail, or take years to get to where the competition is today (remember the OPS fiasco?)
optical_guy 12/4/2012 | 7:22:55 PM
re: Qwest and Tellium Revise Contract wdog - I am willing to stand corrected....care to elaborate?

OG
BBBoa 12/4/2012 | 7:22:56 PM
re: Qwest and Tellium Revise Contract Let's face it, the original Tellium + Qwest deal was done by Nacchio and Carr - next door neighbors in NJ. Tellium didn't "win" the original deal due to product performance (it's rare that wins deals anyway) - the deal was consummated by two neighbors flipping burgers one summer day in mid-2000.

Now, 18 months later as Qwest's growth has slowed and their stock has dropped from the mid 50s to the low teens, Nacchio needed to restructure the deal if he ever expects to be invited over to the Carr's anytime soon.
wdog 12/4/2012 | 7:22:58 PM
re: Qwest and Tellium Revise Contract "flybite - the magic souce is in the ASIC not really the software (application specific integrated circuit)...I have no facts either way, but if they don't have their ASIC its hard to see how they can be running trials. If their ASIC works, then they have the switch...if not.."

No, flybite is correct it is the software that makes it tough. In particular, the protection switching software.
optical_guy 12/4/2012 | 7:22:58 PM
re: Qwest and Tellium Revise Contract flybite - the magic souce is in the ASIC not really the software (application specific integrated circuit)...I have no facts either way, but if they don't have their ASIC its hard to see how they can be running trials. If their ASIC works, then they have the switch...if not..

OG
boson3 12/4/2012 | 7:22:58 PM
re: Qwest and Tellium Revise Contract I have said in the past that I think there are pockets of dissatisfaction with the relationship at Qwest,Gǥ says Kevin Slocum, an analyst with Wit Soundview.

Like asking a short-order cook from Burger King for advice on preparing a porterhouse steak.
flybylite 12/4/2012 | 7:22:59 PM
re: Qwest and Tellium Revise Contract AaaaaaaaaaaapticsGǪ. Not sure if IGd include CORV on this list just yet. The amount of SW development and testing for the core network is very extensive. And, I donGt think you can compare the SW complexity of a CORV 6 port all optical switch with the SW required to manage a CIEN CoreDirector 256 OC-48 ports that can then further manage to the STS-1 level. (What is that 50 STS-1s per 2.5Gb/s port?) Okay say roughly 12,800 squared (163,840,000) possible links as compared to a 6 squared (36) connections. This is a mighty big difference. At least a bigger difference than comparing a Yugo (remember those?) to a FerrariGǪ Yea, I know SW is just 1s and 0sGǪ and the hardware is easier to comprehend and discussGǪ. My experience suggests the SW always seems to take the longest to get right.

F-B-L
aaaaaaptics 12/4/2012 | 7:23:00 PM
re: Qwest and Tellium Revise Contract can CORV take the potential customers away from TELM? DT, WCOM, & C&W (which has made some recent comments about CORV's network capabilities)

optical_guy 12/4/2012 | 7:23:00 PM
re: Qwest and Tellium Revise Contract I agree the last few posts and will go one further.....core/core-edge switches are not broad enough of a product line to sustain any company...must offer as part of a backbone network suite, in my never humble opinion:-)

Cheers

OG
corvo 12/4/2012 | 7:23:00 PM
re: Qwest and Tellium Revise Contract when it comes to "all optical", corvis is the undisputed king. this news could eventually turn out to be good news for corvis.
optical_ranger 12/4/2012 | 7:23:01 PM
re: Qwest and Tellium Revise Contract Once Corvis does come out...I agree...but they are not out yet so I consider them a dark horse...BUT if they can come out with OCS then Tellium is definitely dead because they will be squeezed between all optical and STS-1. I know that Tellium is working on all optical but I give the nod to Corvis there...They have always had very strong technology...
aaaaaaptics 12/4/2012 | 7:23:02 PM
re: Qwest and Tellium Revise Contract now don't go forgetting CORV with their OCS....

once field trials are complete (should be soon)then you've gotta put CORV on that list.
optical_ranger 12/4/2012 | 7:23:03 PM
re: Qwest and Tellium Revise Contract I agree with flybylite. The HDX has STS-1 grooming and given that service providers can more than survive with that, I think TELM will be roadkill --- squeeze play between Ciena and Nortel both of whom can offer transport and switching.....
flybylite 12/4/2012 | 7:23:05 PM
re: Qwest and Tellium Revise Contract After reading the NT boards and blending it with the ear patrol, IGd say that Nortel HDX might just be fighting Tellium Aurora for a real ugly second place prize in the optical switch worldGǪ Sounds like CienaGs just running away here folksGǪ

Any differing views out there???

F-B-L

P.S. Okay, if youGre part of the TELM or NT team, at least identify yourself. Me, IGm just an independent investor.
boson3 12/4/2012 | 7:23:06 PM
re: Qwest and Tellium Revise Contract aaaptics:

The answer is: it doesnt exist.
flybylite 12/4/2012 | 7:23:06 PM
re: Qwest and Tellium Revise Contract HmmmmmGǪ This is an interesting position shift by QwestGǪ I wonder if they got the Tellium Aurora switches installed along with the Ciena CoreDirector switches and discovered that the STS grooming was a good thing after all. And it really is easier to manage one vendorGs software in an ever-changing environment. If you look at the network topology it would seem to be quite cumbersome to maximize the advantage of an adaptive network using both Tellium and Ciena. I believe the CoreDirector switches at the OC-48 rates just as well as the STS-1 rates. If thatGs truly the case, then why would you want to mix the switch management in your network. Too bad Ciena wonGt break out the revenue numbers for their switch compared to their transportGǪ

LetGs seeGǪ During one of their last conference calls, Ciena indicates that Qwest is one of their major customers, if not their largestGǪ They also suggest that their switch business is growing faster than their transport businessGǪ Maybe Qwest picked a demarkation point in their network for the Tellium Aurora switches, looked at the non-value of the TELM warrants, and decided to move in a direction away from Tellium.

Look at the C&W networkGǪ Again Tellium Aurora was supposed to be the core switch for the big traffic and the Ciena CoreDirector was going to break it down at the edges. It also seems that Tellium isnGt getting as much business from C&W as originally thoughtGǪ

And finally we have Dynegy (an Enron wannabeGǪ). Who just raised nearly $500million to pay off debt. Probably not to build out a fiber optic network in todayGs market.

1GǪ2GǪ3GǪ customers petering outGǪ Maybe its time to short TELM ???

Them darn analysts have to remain optimisticGǪ At least until they get their customers out of their TELM positionsGǪ

F-B-L
aaaaaaptics 12/4/2012 | 7:23:08 PM
re: Qwest and Tellium Revise Contract it's only a matter of time now....or is huber going to surprise everyone.

come on huber, let's hear you comment. where's that customer.
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