Nortel Dogged by Competitors
Just days after Nortel Networks Corp. (NYSE/Toronto: NT) announced another disappointing quarter, new evidence points to the company losing some of its long-haul optical transport sales to Ciena Corp. (Nasdaq: CIEN) and Corvis Corp. (Nasdaq: CORV) (see Nortel Says It Sees Clearly Now).
Last Wednesday, Corvis announced that it had won a deal with Williams Communications Group (NYSE: WCG) to supply the carrier with its CorWave ultra-long-haul DWDM platform (see Williams Deploys Corvis). The gear was specifically selected to provide a 10-Gbit/s link between Washington, D.C., and New York City for Progress Telecom, a Williams customer (see Williams Makes Waves for Progress).
Sources say there is a large probability that some of those sales came at the expense of Nortel, even though the deal revolved around an existing contract between Corvis and Williams.
Nortel had been supplying Williams with 10-Gbit/s long-haul DWDM in other parts of the Williams network and had been considered for the Progress Telecom link, say sources. But Williams decided to go with Corvis, which up to this point had only supplied the carrier with OC48 (2.5 Gbit/s) long-haul gear, because Corvis was able to get the link installed and running live traffic within 48 hours of delivery. This is much faster than the two to three months it takes to provision other systems like Nortel’s.
Financial details of the Corvis-Williams deal haven’t been made public, but a Corvis spokesperson says that this purchase order is being counted as part of the existing $300 million contract that Corvis has with Williams.
Elsewhere, rumors continue to swirl that Nortel has lost another contract for its long-haul transport product with Qwest Communications International Corp. (NYSE: Q), as originally reported by Briefing.com last week. Both Ciena and Nortel supply Qwest with long-haul transport gear. Sources say that Ciena’s bids have been coming in lower than Nortel’s, winning them the business and tilting the momentum in Ciena's direction.
Analysts see the new contract battles as evidence that Nortel is losing its long-time grip on the long-haul optical transport business. And that business appears to be flowing to younger, more nimble companies.
“Nortel has a huge installed base, but I think the issue is, are they successfully making the transition to next-generation products?” says Rick Schafer, an analyst with CIBC World Markets. “In the past, Nortel could use its might to undercut competitors and win deals. But today they don’t seem to have the same leverage.”
Nortel declined to comment regarding the situations at Williams and Qwest. The spread of rumors has caused concern at Qwest, which has issued an internal memo to its staff threatening dismissal of anyone who discusses customer contract wins with outside analysts or press, says one source. Qwest also refused to discuss its supplier contracts.
“Nortel has been talking about optical this and optical that for a while now,” says Kevin Slocum, an analyst with Wit Soundview. “But none of it seems to be flying off the shelf. Ciena has steadily eroded Nortel’s market share in optical infrastructure. I think they have a better box and a better portfolio of products. As far as Corvis goes, this is a pretty big win for them, too.”
Nortel appears to have lost some clout now that it has a weaker financial position. Mounting losses have caused its balance sheet to deteriorate, forcing the company to clamp down on vendor-financing deals that it once used as incentives to close business.
And although the long-haul market in general has suffered as telecom companies cut back on spending, Nortel appears to be losing business at a more rapid pace than others. In Q1 2001, which ended in March, Nortel's "inter-city" long-haul business reported revenues of $992 million. In Q2 2001 those revenues dropped to $293 million -- nearly a $700 million drop in revenue for one line of products. Third-quarter figures for this segment have not been published yet, but during the conference call last week the company reported a $750 million pretax loss for excess and obsolete inventory, mostly related to long-haul "optical inter-city" equipment that didn't sell.
By contrast, Ciena's revenues have been relatively stable, even though it's warned about a slower pace of growth (see Ciena's Day of Reckoning). And although Corvis revenues dropped in the last quarter, the company has not lost any of its existing contracts.
— Marguerite Reardon, Senior Editor, Light Reading