Report: Optical networking space can't get any worse
by Rex Crum
June 22, 2001
One day doesn't a turnaround make, but after the troublesome week most fiber-optic technology companies have had, even the smallest hint of improvement is welcome.
Today that hint came from a report issued by Wit SoundView analyst Kevin Slocum, who raised his ratings on optical component makers JDS Uniphase (JDSU) and Optical Components Products (OCPI), and telecom equipment giant Nortel Networks (NT).
In Slocum's opinion, the sector has fallen to a point where it can't get any worse.
"We have had carrier conversations that lead us to believe that the deeper the drop, the sharper the climb from the trough," wrote Slocum in his report. "The current capital expenditure cuts and the reallocation of capacity is apt to produce improved results for the leading carriers, which will enable a return to healthier spending levels."
Growing demand
Slocum said he based his opinion on several issues, including what he said were the growing demands on telecom carriers' networks. Slocum said that major telecom carriers have been taking back network capacity that had been set aside for smaller, emerging carriers and using the bandwidth for their own networks.
Slocum argues that by bringing this bandwidth back in-house, the established carriers have begun to stretch the limits of their own network management and routing gear and will have to begin buying new equipment to handle the strain on their networks. He said the market should begin to improve after the September quarter and gain steam throughout 2002.
"The widespread adoption of high-speed access has not nearly run its course and the move to optical technology to support that service will reaccelerate over the course of next year," Slocum wrote.
Slocum also said inventory writedowns from companies such as JDS and Nortel, as well as restructuring efforts by Nortel and Cisco Systems (CSCO), while painful to look at now, should help put the optical equipment and components sectors in a better position for a turnaround.
Innovate to succeed
Calling optical system technology "immature" because much of it is so new, Slocum said the current poor market conditions should allow manufacturers to declare most of their equipment backlogs obsolete and roll out new gear. "Real product innovation will be the key to their success," Slocum wrote.
Slocum raised his rating on JDS from a "buy" to a "strong buy" and on Nortel to "buy" from "hold."
The Wit SoundView report comes a week and a day after JDS Uniphase warned that its fourth-quarter 2001 and first-quarter 2002 sales would be lower that Wall Street had expected.
In early afternoon trading, JDS shares were up 9.07 percent, at $ 11.90.
Nortel, which warned a week ago that it would lose $19.2 billion in its current quarter, saw its share price rise 3.8 percent, to $ 8.77.
Ciena (CIEN), which Slocum called the "top choice in the [optical] equipment group bar none," was up 5.1 percent, to $41.24.
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