We recently attended a three-day optical-networking conference in Europe where we were the only members of the investment community in attendance.
The optical-upgrade cycle is on track—likely longer and stronger than the conservative view. The conference reinforced our view regarding a looming optical upgrade cycle that we expect to drive meaningful revenue growth for Ciena and other optical-system suppliers over the next several years. The underlying drivers suggest to us that this cycle should prove longer and stronger than we believe most investors currently contemplate.
Attending service providers noted increasing bandwidth consumption leading to increasing fiber exhaust, which in turn is driving the need for more capacity. Most of the Tier 1 PTTs will select 100G [Ethernet standard] vendors over the next 12-18 months with planned deployments beginning in calendar 2012-2013.
Demand for 100G DWDM (Dense Wavelength Division Multiplexing) is strong, driven by finance services, research and education end markets. Most service providers and suppliers in attendance noted growing demand for 100G wavelengths. A number of large service providers also noted initial deployments of 100G wavelengths.
Most of the large PTTs, however, noted that the price of 100G interfaces needs to decline for broad commercial adoption. Most service providers have trials underway, have already selected or expect to select suppliers over the next 12-18 months, and in almost all cases project initial deployments in calendar 2012 or calendar 2013.
We heard service providers and vendors note growing demand for bandwidth in subsea networks. We see this as a potentially significant incremental revenue opportunity for Ciena (currently less than 1% of revenue), among other optical-system suppliers, over the course of the next one to three years.
The need for additional bandwidth, the relatively prohibitive cost of laying new fiber, and the ability of newer optical systems to take advantage of existing amplifier chains appear to be opening the market to new entrants.
While we previously straddled the fence as to how this issue would play out, in the wake of the conference, we see less room for doubt. Every service provider in attendance stated the same goal: to reduce their capital expenditure on relatively expensive core routers by eliminating unnecessary intermediate router hops and shifting capital expenditure to less costly optical-transport network (OTN) systems.
We see this looming trend as a clear incremental positive demand driver for Ciena and other optical systems suppliers, and conversely, an incremental threat to Juniper Networks' (JNPR) and Cisco Systems' (CSCO) core router revenue.
Every service provider at the conference highlighted OTN elements as key platforms in their next-generation core network architectures. |
