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
http://www.lightreading.com