) 29.75 +0.20: It was the best of times. It was the worst of times. Ciena (CIEN) and Nortel are the two cities in this tale. As we cautioned in our
earlier Story Stock on Ciena, it was very important to learn the correct lessons from the company's strong earnings report this morning. Our conclusion was
that companies with exposure to fewer but stronger carriers and whose business was focussed on equipment which reduced network costs, such as optical
switches, would fare better than companies such as NT which had broad exposure to carriers and product lines. It didn't take long to get support for that
conclusion. Nortel's downward guidance was rather severe -- Q1 revenue guidance was taken down to $6.3 bln from $8.1 bln. On the conference call, NT
didn't mince words about the source of the unexpected weakness; it was the US and it was primarily optical. As the company put it, carriers are investing in
utilizing capacity in existing routes but are not looking to build new routes until every network is fully utilized. This actually fits in relatively well with
Ciena's message; its DWDM equipment and optical switches can help carriers to increase capacity and reduce costs in existing networks. Nortel is also
DWDM player, but it has been to slow to deliver its optical switch and has huge exposure to many other optical segments that build on legacy SONET
(sychronous optical network) networks; the demand for which appears to be slackening even as demand for more cost-effective next-generation optical gear
offered by Ciena accelerates. What we may be witnessing is a key turning point in telecom evolution. The wait has been on for legacy SONET networks to
eventually become extinct as they are more costly than next-gen networks. But with capital flowing freely for years, carriers were building everything --
legacy networks and next-gen networks. With capital now scarce and carriers becoming more disciplined, they are focussing on equipment that can deliver
revenue-generating services and reduce network costs. The telecom sector is not a monolith. Just as there was eventually a sifting in the Internet sector that
distinguished winners from losers, so too will there be in telecom. Optical companies with exposure to legacy SONET equipment are a much more dubious
long-term proposition; these include NT, Lucent (LU), to some extent Cisco (CSCO) given its Cerent acquisition, and Redback (RBAK) with its Siara
acquisition (both Cerent and Siara developed boxes that build on legacy SONET networks). Companies that are better positioned to deliver next-gen
networks are CIEN, Sycamore (SCMR), and Corvis (CORV). Note: after hours trading on NT saw the stock trading down to 22.75, off 7 from the close. -
Greg Jones, Briefing.com
To put it another way: NT is getting its butt kicked, and their technology is defunct |
