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Optical/IP

Was Cerent Worth It?

After the implosion of Lucent Technologies Inc.'s (NYSE: LU) Chromatis venture, it makes sense to reconsider another high-profile optical equipment acquisition: Cisco Systems Inc.'s (Nasdaq: CSCO) 1999 purchase of Cerent Corp. for about $6.9 billion in stock (see Lucent Ditches Chromatis).

Was it worth it? Yes, even though Cisco probably won't see a full return on its investment for quite some time.

With the acquisition, Cisco kept Cerent's next-generation Sonet add/drop multiplexer out of its competitors' hands, using its sales and marketing muscle to move more than 30,000 systems out to some 600 customers in a little more than two years.

Cisco paid 100 million shares for Cerent back in August 1999. Those shares, which were worth some $6.9 billion then, are worth about $3.2 billion now, when adjusted for a two-for-one stock split in the spring of 2000. "Everyone paid too much for everything in the last couple of years," deadpans Dave Dunphy, Senior Optical Infrastructure analyst at Current Analysis .

The success of the products that came from the Cerent acquisition, especially Cisco's ONS 15454, has helped give the enterprise-focused equipment company a toehold with carriers and service providers. That paved the way for Cisco to ship some 500 units of the next Cerent-based product, the ONS 15327, to more than 80 customers since it was introduced in January.

By other metrics, however, Cisco's roaring success has some blemishes. For one thing, with service provider spending slowing and becoming more concentrated, there's no telling when Cisco's going to make its money back. CIBC World Markets estimates that Cisco's ONS 15454 product pulled in about $100 million in revenues in 1999, $700 million last year, and will likely contribute between $400 and $500 million this year.

Infonetics Research Inc.'s Michael Howard has a more optimistic take. He says the ONS 15454 pulled in about $900 million in revenues last year and, thanks to European sales, upcoming OC192 (10 Gbit/s) functionality, and some added Ethernet ports, it might do at least that or even better this year.

Of course, it's not known how much of that will turn into Cisco profits, and there's no telling how much vendor financing it took to win some of those sales. It's also hard to tell how much of Cisco's optical equipment customer base is solid. There's no doubt that quite a few of the 600 customers Cisco touts in that area have gone under (see Cisco's Under-Powered Carriers ).

"We estimate that about 40 percent to 50 percent of [Cisco's] carrier business comes from emerging carriers," wrote Lazard Frères & Co. LLC analyst Truc Do back in May. "This exposure will likely hurt Cisco's carrier growth due to a lack of funding."

Nonetheless, Cisco has a defensible market, and it has enjoyed a big headstart on its optical transport competitors such as Redback Networks Inc. (Nasdaq: RBAK), Ciena Corp. (Nasdaq: CIEN), Metro-Optix Inc., and White Rock Networks. "Though the challenges in this area are becoming tougher, I don't think the ONS 15454 is a threatened platform," says Dunphy of Current Analysis.

One lingering question, though: How well will Cisco be able to capitalize on the success of its Cerent-created installed base? Given that it has dropped out of the core switch market, and its long-haul DWDM product hasn't taken significant market share, there is a limit to what service providers can expect from Cisco.

Even Cisco's Optical Transport Business Unit is going through a change following Cisco's recent management reorganization (see Reorg Rips Through Cisco's Ranks). Former Cerent CEO Carl Russo handed over operations responsibilities and, though he's denied that he's going anywhere, rumors persist that he's already negotiated a November departure.

Further, former Cerent employees continue to turn up at startups in and around Petaluma, Calif. Some of the top brass at Calix Networks, where Russo holds a board seat, are former Cerent executives. And one of Cerent's top engineers, Paul Elliott, recently parted ways with Cisco.

"Relative to its time, Cerent was one of the more successful acquisitions," says Salomon Smith Barney's Alex Henderson. "But, though Cisco has had blotches of success, overall, I don't think they've done a great job in penetrating the service provider market."

— Phil Harvey, Senior Editor, Light Reading
http://www.lightreading.com
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freethinker 12/4/2012 | 7:52:14 PM
re: Was Cerent Worth It? "...but I wonder if anyone knows which investment bank handled CSCO aquisitions."

No one - they've all been home-brewed deals.

Freethinker
^Eagle^ 12/4/2012 | 7:52:10 PM
re: Was Cerent Worth It? I am not sure where you get your information or ideas...; but I have years of experience at RBOC's including SBC, the PacBell SBC, Ameritec SBC, Nynex Verizon, GTE Verizon, Bell Atlantic Verizon, and US West Qwest, and I can tell you that Cerent Cisco has made insignificant traction inside the RBOC ILEC space. Those accounts are served quite well by various combinations of Fuji, Lucent, Nortel, Tellabs Alcatel for their optical transport and switching needs. Don't let any other stories fool you. this includes next gen SONET gear as well as DWDM, DXC or OXC, from core to edge. Where those big players don't own the RBOC business, you have second Teir players like ECI, Hitachi, NEC, Marconi, Ciena, AFC, owning various niche's within the space.

Cisco is far far behind any of these in transport at edge or core. And the Cerent 454 while a worthy box is still just a SONET box with a little DWDM bolt on shelf they buy turnkey from JDSU or Avanex or others. The DWDM is not even really a part of same shelf.

Cisco Cerent is incredibly vulnerable to the current downturn due to the vast portion of their business being in greenfield carriers, or greenfield sub portions of companies like MCI/Worldcomm or Qwest.

Where you might have heard something like you are describing, is that Cisco has made BIG sales volume strides inside RBOC's, but NOT for deployment of Cisco gear into BOC networks per se. Cisco has done well inside RBOC's selling routers for the RBOC internal LAN/WAN Enterprise to hook up servers and gear to run their internal network management communications infrastructure...not for hauling customer traffic. In this instance the RBOC is just like any other big enterprise customer. And Cisco is strong in the enterprise.

The other big place Cisco has done well is with the outsourcing/ system/ network integration arms of the non-regulated portions of the RBOC's. What many folks don't know is that among the largest systems and network integrators and resellers in the world are the RBOC's!! SBC alone is larger than EDS or Arthur Anderson, and nearly as large as some of the truly big players like IBM in the systems integration business. In this portion of the business, the RBOC designs and builds and sometimes operates large enterprise networks for big end users in their territories. Like state and regional government, large companies, etc. In this capacity, the RBOC's are some of CISCO's very very largest customers and resellers. The RBOC buys Cisco gear use in their enterprise customers campus networks.

This is NOT the same as penetrating the RBOC transport and switching and signalling networks.

sailboat
flanker 12/4/2012 | 7:52:06 PM
re: Was Cerent Worth It? ...What many folks don't know is that among the largest systems and network integrators and resellers in the world are the RBOC's!! SBC alone is larger than EDS or Arthur Anderson, and nearly as large as some of the truly big players like IBM in the systems integration business...

Yes, and when an enterprise is too stupid to manage its own network they get taken to the cleaners!


mboeing 12/4/2012 | 7:52:02 PM
re: Was Cerent Worth It? "...Cisco never mastered the key to selling into RBOC accounts."

Well, you're probably right if you refer to optical transmission gear only. OTH Cisco knows quite well how to sell IP gear into the incumbent operators. Take Deutsche Telecom as an example. They have 400+ GSR routers in their German IP network alone (and they had Juniper, Nexabit etc. under evaluation before deploying GSRs). I wouldn't call that being unable to sell into "old world" carriers.

/MAB.
flanker 12/4/2012 | 7:52:00 PM
re: Was Cerent Worth It? They have 400+ GSR routers in their German IP network alone (and they had Juniper, Nexabit etc. under evaluation before deploying GSRs). I wouldn't call that being unable to sell into "old world" carriers.

yeah, but the whole point is they are not moving closer to the core in terms of market share gains. Granted LR says the extent of 454 sales is pretty good. (and i dont know where they got the number, $750mln) for annual 454 sales. I think that a bit inflated.

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