Telecommunications Equipment
Highlights From Supercomm -- Day 1
June 5, 2002 SUMMARY
* The first day of SuperComm held few surprises with
Alex Henderson carrier-focused vendors continuing to cite limited
visibility and weak customer demand.
* Within the edge routing space, we believe vendors are
Daryl Armstrong seeking to support their existing IP capabilities with a
stronger sales capability. Recent transactions by Juniper
and Redback seem to support this thesis.
Matthew Gavigan * Sonus is in the process of positioning themselves to
target opportunities in the MSO market. While we expect
design wins in 2002, meaningful revenue is not likely to
surface before 2H03.
* Cisco continues to argue that their strong positioning
in the enterprise makes them optimally positioned to help
carriers deepen their relationships with these customers.
We believe that Cisco's efforts will be rewarded with
incremental share gains in the carrier market over the
next few years.
OPINION
Overall, SuperComm has been marked by modest attendance. Despite this, we
have been fortunate to be able to schedule a number of management meetings
with both private and public companies that provide some insight into market
conditions. Net-net, managers of carrier-focused vendors continue to
complain of limited demand. On the optical front, while we continue to hear
of RFP activity, no one believed that any business from these potential deals
would result in revenue calendar 2002. Rather than dwell on the difficult
conditions, vendors seem to focusing their efforts and resources to better
positioning themselves strategically for when market conditions stabilize.
Vendors Are Focused On Driving Sales Capabilities In The Edge Routing Space.
We were particularly interested in hearing from Redback Networks (RBAK, not
rated -- $1.98) given their competitive positioning in the edge routing
market, where Cisco (CSCO, 1H -- $16.08) and Juniper (JNPR, 2S -- $8.67) also
compete. Kevin DeNuccio, the company's President and CEO, commented that he
was seeing a shift toward services, as opposed to the trends toward transport
and connectivity seen in the industry in the last few years. This is a
viewpoint we have argued for some time. Based on the market share numbers
offered by the company, the market has boiled down to three primary players:
Cisco, Juniper, and Redback. Their respective market shares in the edge
aggregation market are believed to be 59%, 18% (including Unisphere), and 8%.
In Redback's view, these are the three vendors with the strongest product
portfolios and IP expertise. Having established their IP credentials,
Redback believed these players are now focused on driving their sales
distribution capabilities. Juniper's recent acquisition of Unisphere helped
to serve this purpose by also providing a distribution agreement with Siemens
(SI, 2M rated by Mark Davies Jones -- $60.59). Similarly, Redback has also
inked deals with Nokia (NOK, 3M rated by T.C. Robillard -- $13.52) and IBM#
(IBM, 1M rated by Richard Gardner -- $79.31). Cisco, given their size and
established sales capabilities, is largely seen as having the ability to
tackle the opportunity alone.
In terms of customer counts, Redback commented that around 54 carriers were
engaged with the company, of which 9 were revenue-generating customers. This
compares to a total of 45 at the end of 1Q 2002.
REVENUE EXISTING TRIALS POTENTIAL
GENERATING TRIALS
Now 9 27 18
Q1 2002 8 24 13
Q4 2001 4 16 8
Source: Redback
Sonus Is Targeting Interesting Opportunities In The MSO Market. We also had
an opportunity to spend some time with the senior management team at Sonus
(SONS, 1S -- $1.99). While the company's revenue stream and share price have
been undeniably impacted by the ongoing telecom retrenchment, they did
provide some encouraging data points. First, management expects to begin
growing revenues again by year-end based on their trial activity and comments
they hear from the carrier community. While we discount this statement a bit
because of our concerns about capital spending overall, we are pleased to see
them still confident in meeting this target.
Secondly, and perhaps more interestingly, the company seems to be preparing
to heavily solicit opportunities in the MSO or cable market. At the show,
the company unveiled their new SMARRT cable solution. This is a next-
generation voice offering specifically geared toward the needs of the cable
market. The components of the SONUS solution include:
* Insignus Call Management Server (CMS) -- the product manages the CMTS and
media terminal adapters of the cable network. This product also provides
CALEA functionality, necessary for regulatory requirements such as
wiretapping.
* Insignus Media Gateway Controller (MGC) -- this product interfaces with
the PSTN and is responsible for signaling to other long distance and local
carriers.
* Insignus SGX SS7 Gateway (SG) -- this product links the cable voice
network with the PSTN's SS7 network.
* GSX9000TM Open Services Switch -- this media gateway is a flagship product
for SONUS that is at the core of their solution for both the telcos and
cable companies.
* Sonus InsightTM Management System -- this is a web-based management
system for SONUS' packet voice solution.
We still believe we are in the early stages of this potential market; a point
with which SONUS tends to agree. At this point, we do not expect to see any
revenues from their efforts here in the calendar 2002 timeframe. At the
earliest, we would expect design wins in 2002 to result in noticeable
revenues in the 2H 2003 timeframe.
We believe that the company has probably seen the greatest immediate interest
in the US markets. They implied that the pace of potential deployments in
Europe is likely to lag not only US but also Japan.
Another interesting area of discussion that we held revolved around the near-
term impact of intra-lata relief by the RBOCs on purchasing SONUS' solution
near-term. Management noted that they expected any near-term capacity usage
to be met by the RBOCs' existing legacy voice switches, greatly moderating
any near-term pick-up in orders due to long-distance entry. Interestingly,
this was consistent with the commentary that we had also heard from an RBOC
when asked this same question.
Finally, when we briefly discussed their balance sheet, they reminded us not
to expect the company's DSO metric to remain at its very low level of 16 in
the last quarter. Instead, a range of 45-60 days should be expected sometime
this year. Management noted that such an increase in DSOs is likely to
consume roughly $6-$10 million in cash.
Cisco Seems Intently Focused On Bolstering Their Service Provider Franchise.
In only our first day at the conference, we spent a lot of time with Cisco.
First, we had an opportunity to speak with two senior executives from their
carrier group. Secondly, Cisco provided a presentation detailing their
carrier-related strategy and focus. On the first point, much of our
discussion revolved around ATM switching. We estimate that the market for
ATM gear probably came in around $3.8 billion in 2001 of which Cisco held 18%
share. While we expect the market for ATM equipment to decline on a year-
over-year basis in 2002, we still see this as a resilient part of the
equipment space. A primary reason is that the demand for ATM services have
held up pretty well even in this tough environment. Cisco estimated that ATM
services overall are growing at a mid-teens rate. While this is down from
the 30%-type growth we have enjoyed in recent years, it is still fairly
strong relatively speaking.
On the competitive front, the vendor sees few surprises. The usual suspects
such as Alcatel (ALA, 3M rated by Mark Davies Jones -- $11.56), Nortel (NT,
2H -- $1.80), and Lucent (LU, 2H -- $3.13) continue to enjoy good success in
being included in deals. One constructive point was that the executives
noted that pricing on the ATM side remains stable. The flip-side, however,
is that it takes deals much longer to close. For instance, the typical sales
cycle for these products used to run roughly 3-18 months. Now the average
has skewed toward the high end at around 15 months. When a deal is finally
won, the key success criteria consistently include high network availability,
investment protection, and multiple services.
From a financial standpoint, management did note that they believed the ATM
business has bottomed and begun to improve both on activity, revenue, and
margin side.
As noted previously, Cisco also had a presentation geared toward their
carrier customers and designed to address their strategy in that space. Net-
net, there were few surprises. Management still believes that it will take
2-5 years before the fruits of their labor are likely to be clearly visible.
The vendor continues to build the infrastructure necessary to be a meaningful
player in this space. They argued that their strong positioning within the
enterprise space gives them good insight that would be useful to carriers
attempting to ramp new services to their end-customers.
In terms of near-to-intermediate term goals, Cisco has targeted becoming the
#1 or #2 supplier in a number of markets including the core IP/MPLS market,
transport, edge aggregation, metro optical, and Ethernet transport markets.
On the product announcement front, Cisco incrementally improved their
existing product portfolio. For instance, they added a number of new
interfaces to their GSR 12000 product family. The vendor introduced a single
port 10 Gbps router line card. In addition, they introduced a 10 Gbps line
card with Dynamic Packet Transport /Resilient Packet Ring (DPT/RPR)
technologies. The pricing for the single port 10 Gbps card stands at
$175,000. The pricing for the DPT cards comes in two flavors. The 1 port
OC-192 DPT card comes in at $150,000. The 4-port OC-48 line card cost stands
at $240,000.
Net-net, while little that was discussed represented new information. We
were pleased that Cisco seems to remain focused on the task of taking share
in the incumbent carrier space. We believe their financial strength gives
the flexibility to build the infrastructure necessary to be successful in
that market. |
