Ciena and Nortel travel different paths
By Jeffry Bartash, CBS.MarketWatch.com
Last Update: 12:15 PM ET Feb 16, 2001
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WASHINGTON (CBS.MW) -- Bigger, it seems these days, isn't necessarily better in the telecommunications-equipment industry.
Just look at the fortunes of Ciena -- and the misfortune of Nortel Networks.
Last year, both companies were darlings of the investment world. Each offered the latest in fiber-optic technology, which carriers gobbled up so their networks could handle the explosion in data and Internet traffic.
Yet while Ciena (CIEN: news, msgs) on Thursday boasted of accelerating demandfor its fiber-optic gear, Nortel (NT: news, msgs) on the very same day warned of a steep declinein projected sales. What gives?
"With the striking contrast of absolute blowout numbers and guidance from Ciena and the absolute implosion of Nortel, it is hard to know whom to believe and threatens to leave us, well, dazed and confused," noted WRHambrecht analyst Tim Savageuax.
Fortunately, it appears, the stark contrast may not so hard to explain. Ciena, just a fraction of the size of Nortel, exclusively produces the very latest in fiber-optic switches and other intricate equipment specifically geared for Web-centric networks. Nortel, on the other hand, is spread across a range of market segments, some of which are in steep decline.
In particular, Nortel's circuit-switching business, once the company's mainstay, is losing altitude faster than the company expected as carriers swiftly move away from equipment designed for voice-based networks. The same problem afflicts Lucent Technologies (LU: news, msgs) , another old line equipment giant.
More broadly, the slowing U.S. economy also hurts the industry giants. Simply put, the more markets a company is exposed to, the more likely an economic downturn will cut into sales as a variety of customers reduce spending.
What's most surprising is that Nortel didn't see this coming sooner. Just last month, it reiterated what now seem like pie-in-the-sky projections for 2001 growth and earnings.
"The business downturn in the United States is faster, it's deeper and it's more severe than we thought," chief operating officer Clarence Chandran told CBS.MarketWatch.com. "We did not see this in the earlier guidance we gave in January."
Ironically, companies such as Nortel, Lucent and Cisco Systems (CSCO: news, msgs) had gone on an acquisition spree the past few years to bulk up and position themselves as one-stop providers that could fill all of a carrier's equipment needs. Lucent has since reversed course, spinning off Avaya (AV: news, msgs) , its corporate-phone system arm, and soon, Agere, its micro-electronics business.
While the bigger-is-better approach might pay off once the economy recovers, Nortel's sheer size and reach is a hindrance for now.
Not so with Ciena and other upstarts such as Redback Networks (RBAK: news, msgs) , Sycamore Networks (SCMR: news, msgs) and Sonus Networks (SONS: news, msgs) .
Because Ciena focuses exclusively on the high-growth portion of the equipment sector, snazzy fiber-optic gear for next-generation networks, the company is less susceptible to cutbacks in customer spending or even to the slowing U.S. economy.
That's because carriers can't afford to skimp on next-generation optical gear. Big corporate customers -- that's where the moolah is -- want more data and more speed. If their current carrier can't give it to them, they'll find someone else.
As a result, carriers have to plunk down cash for optical equipment to upgrade and expand their networks even as they face intensified competition and sluggish growth prospects of their own. Ciena Chief Executive Patrick Nettles told CBS.MarketWatch.com that the company's biggest problem is expanding fast enough to meet demand.
At the same time, however, carriers are scaling back on purchases of older circuit-switching products, often called "legacy" equipment in industry parlance. The companies that continue to produce the bulk of legacy gear, oldliners such as Nortel and Lucent, are the ones who suffer most.
Still, Ciena's rosy outlook for 2001 should remain subject to scrutiny. Some analysts question whether the U.S. downturn will eventually prompt carriers to trim purchases of fiber-optic equipment as well. For their part, Nortel executives said optical sales might grow at just 25 percent this year, half the rate of its previous forecast.
Amid the confusion, analyst Susan Kalla of Bluestone Capital Securities is advising clients to "stay away until the dust clears."
Yet Ciena's Nettles remains confident despite market concerns about the state of the economy. "I can't anticipate the unexpected," he said in an interview.
What's helping Ciena is the cyclical nature of the equipment industry -- and a temporary lead in technology.
Many of its products have been in testing for several years and they are just starting to bear fruit in the form of new contracts, suggested Nancee Ruzicka, a telecom-equipment analyst at The Yankee Group.
This week, for instance, Ciena announced Level 3 Communications (LVLT: news, msgs) , the high-flying next-generation carrier, as the latest customer to start receiving shipments.
Just as important, Ciena is seen as having superior technology in the never-ending race to roll out the next generation of high-end equipment. The company's products are open, meaning they work with equipment from other vendors, and they save cash-conscious carriers space and money.
While Nortel is close to catching up, many of its latest products are still early in the testing stage and won't produce significant revenue for a year or more, Ruzicka noted.
"They're not quite there yet," she said.
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