Tellabs Losing Its Edge?
In the report, Greenholtz claims that Tellabs, which dominates the digital crossconnect market with its TITAN 5500, has lost a potentially large multiyear contract with Verizon for its TITAN 6100 metropolitan area DWDM platform.
Neither Verizon nor Tellabs would confirm or deny the claim that a deal has been called off. But if it is true, this is yet another sign that Tellabs is struggling to get its next-generation optical networking gear accepted by its core customers. Verizon, one of the largest RBOCs, has been a loyal Tellabs customer, spending millions of dollars over the past several years deploying TITAN 5500s for the aggregation of TDM (time division multiplexing) traffic.
The old-school Sonet crossconnect boxes have been Tellabs’ bread and butter, still making up the majority of its revenues. Verizon was especially impressed with the TITAN 5500 in the wake of the World Trade Center disaster in New York last month. The equipment, which was buried under ash and fallen debris, was still able to pass traffic after being rebooted, says Greenholtz in his report.
But difficulty in securing the contract for the 6100 indicates that Tellabs is struggling to gain a footing in next-generation DWDM gear, where other players are stronger. Wall Street analysts say the company needs to add significant revenue from its newer generation of gear.
“The fact that they didn’t get this contract is significant, because they haven’t gotten much traction on any of their next-generation products,” says Rick Schafer, an analyst with CIBC World Markets. “But it’s not surprising.”
So far, Tellabs has introduced three new optical platforms: the TITAN 6100 ring-based DWDM transport product, the TITAN 6500 ATM crossconnect, and the TITAN 6700 optical switch. But none of these products has produced significant revenue for the company, says Alex Henderson, an analyst with Salomon Smith Barney. "I’ve heard that Verizon is absolutely committed to the 5500,” says Henderson. "But it’s not clear that they are committed to the newer products. The 6500 has been out for about a year and a half, and it hasn’t generated significant sales. What does that tell you?”
Tellabs had been in negotiations with Verizon to supply the RBOC with its ring-based DWDM, metro area gear. Verizon’s RFP (request for proposal) for this equipment was potentially worth as much as a $1 billion over the next five years, says Greenholtz.
Verizon has already been using point-to-point DWDM products from Lucent Technologies Inc. (NYSE: LU) and Ciena Corp. (Nasdaq: CIEN).
Greenholtz says the negotiations ended with Tellabs not winning any part of the new buildout. He isn’t sure what happened, but he suspects that the main sticking point was price.
“I think there was probably discussion over price,” he says. "Tellabs likes to see big margins. It’s used to that with the 5500, and I don’t think they were willing to come down in price."
Salomon Smith Barney’s Henderson says he has heard that the contract will likely go to Nortel Networks Corp. (NYSE/Toronto: NT), which also has a ring-based DWDM solution for the metro and recently signed a multiyear contract with SBC Communications Inc. (NYSE: SBC) for its metro DWDM gear.
Verizon has also been evaluating Tellabs next-generation crossconnect, the TITAN 6500. Analysts covering the company say it is still too early to tell if Verizon will be deploying this gear in its network.
While the loss of the metro DWDM contract in the Verizon network won't break Tellabs, it suggests the company is struggling to diversify its revenue base and break into next-generation optical networking gear.
— Marguerite Reardon, Senior Editor, Light Reading