ONI's Facing a Drought

So far, it's not shaping up as a power marriage.

Just weeks after its potential acquirer, Ciena Corp. (Nasdaq: CIEN), warned it would be missing its first-quarter numbers, ONI Systems Inc. (Nasdaq: ONIS) has also warned that its revenues will be way down for the first quarter.

Investors reacted negatively to the news, causing share prices in the sector to slide. ONI closed down $0.32 (5.25%) to $5.77, and Ciena closed down $0.52 (5.85%) to $8.37.

In a statement issued last night, ONI said it expects revenues of $18 million to $24 million and a pro forma loss in the range of $0.24 to $0.27 per diluted share. As a result, Merrill Lynch & Co. Inc. analyst Simon Leopold reduced his estimates to $19 million for the quarter, down from $40 million.

ONI’s problems stem from the fact that many of its customers, like Qwest Communications International Inc. (NYSE: Q) and Williams Communications Group (NYSE: WCG), are having financial problems that have curtailed their spending.

And, even though the company has gotten through the Telcordia Osmine process, which will allow it to sell to incumbent RBOCs, these carriers don’t seem to be very interested in metro-area DWDM.

Merrill Lynch's Leopold says that it comes down to economics -- that these carriers have not yet found a compelling enough reason to start deploying DWDM in the metro. In fact he says the market is only expected to generate $700 million in revenues this year. Overall spending in the metro is expected to be $10.9 billion for the year, with Sonet still dominating the mix.

“Our read on the space is that DWDM in the metro only makes sense in certain networks where there is a variety of traffic types,” he says. “It’s a niche application, and not every location is going to be able to justify the business case for it.”

Ed Kennedy, senior vice president of the metro networking group at Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), also says that he doesn’t see much demand for metro DWDM yet. Tellabs, which has a long history of selling to incumbent carriers, has the Tellabs 7100 (formerly called the Titan 6100) that competes with ONI’s products in the metro.

“The DWDM market will be rough for a while, because there are several other ways to address the problem with other solutions,” he says. “We’re seeing some demand for the 7100, but let’s just say it isn’t selling like gangbusters.”

As for the impending merger with Ciena, both companies say that it is still on.

“We continue to push forward and will go through the necessary steps to complete the merger,” says Glenn Jasper, director of public relations for Ciena. “I can’t say that we expected this warning, but this sector is going through difficult times, and we expect that in the end this merger will create a stronger company.”

— Marguerite Reardon, Senior Editor, Light Reading
edgecore 12/4/2012 | 10:46:04 PM
re: ONI's Facing a Drought Why is the growth limited, is it because the RBOCs have enough fiber and they do not care about DWDM in the metro as a fiber saver?

Is it also that the overly hyped managed wavelength services or storgae services are really not being accepted of generating revenue for carriers...

Any thoughts?

dwdm2 12/4/2012 | 10:46:03 PM
re: ONI's Facing a Drought My guess is that the RBOCs are happy with their installed legacy staff as the incoming revenue keeps them rolling...

Meanwhile consumers are suffering, but the situation is not critical enough for upgrade/new investment...
optigirl 12/4/2012 | 10:46:03 PM
re: ONI's Facing a Drought The BOCs just don't need it right now. Most of the early WDM applications were for fiber relief and/or point to point applications. Ring technology is still a problem for them and you can forget mesh......

Secondly, companies are getting wise to the fact that they can get more out of existing resources and infrastructure. DWDM had been talked about for what, 4-5 years now? Please tell me why we need it because I do not see anything that justifies the cost. BOCs are also SONET based animals who have not even adopterd OC-192 in any large fashion.

Who's got the damn Prozac???


allidia 12/4/2012 | 10:46:02 PM
re: ONI's Facing a Drought Remember that ONI is a transport box. We are talking about the transport of DWDM. We aren't talking about DWDM (15xx's) not being used in the Metro.
chasbo 12/4/2012 | 10:46:01 PM
re: ONI's Facing a Drought metro DWDM is not dead. These vendors products are less attractive because their pricepoint is much higher than SONET equipment. A metro DWDM vendor with pricepoints at or below SONET will succeed.
lighten up!! 12/4/2012 | 10:45:58 PM
re: ONI's Facing a Drought The fact of the matter is that services like T1 continue to generate significant revenues for RBOCs. It doesn't pay to deploy expensive broadband and DWDM gear in the metro for delivering services with little margin and cannibalize their revenue stream. Couple that with the regulatory environment which provides little incentives for the ILECs to do massive upgrades. Also, copper is ubiquitous and fiber only reaches less than 5% of commercial buildings in the U.S.
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