Equipment Perspectives From The WCG Analyst Day Part II
February 14, 2001 SUMMARY
* On February 12-13th, Williams held its annual
B. Alexander Henderson analysts' meeting in New York.
* Williams reduced their 2001 capital spending
forecast by roughly $400 million, pushing the
Timothy Anderson shortfall into 2002.
* The carrier now expects to only pay certain
vendors when their equipment is installed, not when
Daryl Armstrong its shipped.
* Consistent with commentary from ONI Systems,
Williams asserted that 40 Gbps systems are likely to
be first deployed in the metro.
* WCG affirmed the utility of all-optical mesh
architectures within the core of telecom networks.
* Williams complimented Corvis technology asserting
that it allows them to more efficiently provide
restoration capabilities within their mesh network.
* While we expect Williams' shift in spending to
only slightly affect vendors, we are concerned about
its effect on SCMR with significant exposure to WCG.
SUMMARY VALUATION AND RECOMMENDATION DATA
Earnings Per Share
Company (Ticker) Price FYE Rating Target LTGR Current Yr Next Yr
CIENA (CIEN) $69.19 Oct Curr 1H $145.00 40% $0.33E $0.47E
Prev 1H $145.00 40% $0.33E $0.47E
Corvis Corporation- $15.48 Dec Curr 1S $40.00 60% ($0.21)E $0.05E
(CORV) Prev 1S $40.00 60% ($0.21)E $0.05E
Nortel Networks Corp- $29.75 Dec Curr 1H $60.00 30% $0.98E $1.25E
. (NT) Prev 1H $60.00 30% $0.98E $1.25E
ONI Systems (ONIS#) $40.88 Dec Curr 1S $95.00 60% ($0.13)E $0.22E
Prev 1S $95.00 60% ($0.13)E $0.22E
Sycamore Networks- $22.56 Jul Curr 1H $35.00 50% $0.23E $0.32E
(SCMR) Prev 1H $35.00 50% $0.23E $0.32E
WILLIAMS COMMUNICATIONS HELD ITS ANNUAL ANALYSTS DAY MEETING ON FEBRUARY 12-
13--WE SEE MORE NEGATIVE NEWS FOR THE EQUIPMENT VENDORS COMING OUT OF THIS
MEETING
Williams Communications Group provided a tutorial session on network
technology as well as an overview of their business lines during their annual
analysts meeting. We believe that the meetings provided interesting insights
about their view of the evolution of networking technologies while providing
some counterpoints to commentary made by their competitor Level 3
Communications during their analysts meeting presentation. In terms of mesh
architectures, for example, they affirmed that meshes were of great utility,
improving overall network cost economics. While on initial glance this seems
to conflict with commentary from Level 3's analysts meeting, actually it
really does not. In Level 3's case, they are referencing the implementation
of an electronic mesh network (O-E-O) with incremental equipment expenses
necessary to ramp capacity. The incremental costs of the electronic
equipment offsets the efficiency benefits of the mesh architecture. In
Williams case, they are deploying an all-optical mesh, where those
unfavorable cost dynamics are not present.
In general, the meeting added more fuel to concerns about the outlook for
equipment vendors. We see the comments most negative for Sycamore and for
Corning where comments challenge the value proposition of the products from
these companies and where Williams is attacking pricing and payment times.
Consistent with commentary heard from ONI Systems on their recent earnings
call, Williams expects OC-768 or 40 Gbps functionality to be first deployed
in the metro, not in the long haul network segment.
Williams Pushes Out Some 2001 Capital Spending Into 2002. WCG provided
comprehensive financial guidance via press release and during the meeting.
One point of interest was a roughly $400 million decrease in capital spending
during 2001 from $2.3 billion to around $1.9 billion. Most of this decline
is attributed to their efforts to closer align capital spending with
revenues. They intend to only pay for some equipment from vendors when their
business dictates its use regardless of when its received. This means that
some cash outlays are likely to be pushed into the 2002 timeframe. While
this shift impacts a number of the carrier's vendors, we are most concerned
about the impact on Sycamore. Williams represents 50% of Sycamore's revenue
and the vendor does not have the benefit of an enormous customer base and
revenue stream, like Nortel, in order to buffer the impact. We view this
maneuver as an act of gamesmanship between the service providers and
equipment vendors. Williams multi-vendor strategy probably gives them enough
leverage to accomplish this, but we believe that the carrier likely had to
make other concessions in other areas such as pricing.
Williams Seems To Embrace An Optronics, Relative To A Fiber Based Focus,
Within Their Network. Williams argued that the innovation cycles within the
optronics were much more rapid and incremental than those in fiber. They
cited that the cost of providing OC-192 connectivity has fallen 90% over the
last couple of years due primarily to optronics, not fiber. Furthermore,
they believed that the next quantum shift in fiber technology is likely 2-3
years away with the introduction of soliton technology in fiber. In this
technology, offsetting dispersion and compression forces maintain the shape
of an optical signal as it propagates along the fiber, reducing the need for
frequent regeneration.
The carrier repeatedly referenced the 70 km (40 mile) spacing of amplifiers
within their network, relative to the 100 km (60 mile) spacing of competitors
such as Level 3. They argued that this made their networks more leveraged to
the improvements in optronics, particularly within the ultra-long haul area.
They explained that when deploying Corvis technology, for example, they can
garner a 50% improvement in network economics due to this closer amplifier
spacing relative to what other carriers employing Corvis can enjoy.
Furthermore, the believe that their need to light additional fiber is likely
to be less than comparable carriers, given the same amount of network
traffic. They believe that the closer amp spacing should allow them employ
denser DWDM systems, reducing the need to light additional fiber strands.
This orientation contrasts with Level 3 which designed its network to be more
skewed toward fiber innovation cycles, by its decision to employ numerous
empty conduits in order to run new generations of fiber.
Williams Believes Mesh Architectures Are Great In The Right Place. When asked
about mesh architectures, Williams management commented that these structures
were clearly superior within the network core but of more limited utility
within the metro segment. In their view, mesh architectures work best where
there are numerous network crosspoints, which tends to occur within the
core. Conversely, within the metro there are usually only one, or maybe two
rings.
Notwithstanding these limitations, Williams commented that meshes were quite
useful in the core of the network. SONET rings are only 50% efficient in
theory given there is 100% network redundancy in order to provide restoration
capabilities. Management believed, however, that the practical efficiency in
a real-time environment was only 38%. Conversely, Williams asserted that
the theoretical efficiency of mesh infrastructures are 75%, with the
pragmatic efficiencies in the 65% range. Management also commented that mesh
structures provide more flexibility in terms of QoS structures, allowing
carriers to provide differentiated services that can address different
customer sets. Within a mesh, a carrier can offer APS or Automatic
Protection Switching which is SONET ring-like protection. In addition, other
restoration options such as preemptive mesh and unprotected transport.
Another point that we gained in our commentary with management was the degree
of difficulty in building an effective mesh networks. In order to garner the
promised efficiency benefits from mesh, its critical to make a number of key
network design decisions. In addition, limited interoperability issues are
impacting the attractiveness of some vendors equipment, inhibiting their mesh
capabilities.
It should be noted that recently Level 3 made comments regarding the lack of
attractiveness of mesh architectures, asserting that the technology was
immature and of limited economic benefit today. It should be noted that
comparing the statements of the two carriers is analogous to comparing apples
to oranges. Level 3 was refering to implementing an electronic mesh
architecture, where the carrier must bear incremental electronic costs to
ramp the capacity of the network, such as inputing line cards within O-E-O
switches throughout the network. Conversely, Williams is implementing an
all-optical mesh (O-O-O), where those incremental electronic costs are
avoided, enhancing the network economics of the architecture.
Williams Compliments The Usefulness of Corvis' Technology. Management
commented that the Corvis technology provides them with significant economic
benefits in terms of network costs. In addition to Corvis' traditional
positioning as an enabler of ultra-long haul transport, WCG also asserted
that the technology was helpful in terms of lowering the cost of restoration
capabilities within a mesh network. During a fiber cut or network failure
within a mesh architecture, traffic is re-routed through alternate routes
within the network to compensate for the problem. Williams argues that many
of these alternative paths are far longer than the original network passage
and that Corvis provides the ability to transverse them without regeneration
significantly lowers costs. For example, a failure between San Francisco to
Los Angeles maybe requires a re-route path through Las Vegas. We question
this assertion, however, given that its likely that the service provider
already possesses regenerator huts within these network segments for the
short haul traffic that typically flows through them when there is no network
failure.
OC-768 Functionality Is Likely To Surface In The Metro First. In discussing
the arrival of OC-768 or 40 Gbps functionality, Williams made a few
interesting observations. First, they expect this technology to surface
first within the metro segment of the network, within high traffic corridors
such as the New York metropolitan network for example. This contrasts with
conventional wisdom that would suggest that the higher speed would be
deployed within the core first and the network tributaries after that point.
One of the primary benefits cited is the ability to reduce the number of
interfaces within the network. Going from OC-192 to OC-768, for example,
provides a 4 to1 drop in interfaces. Considering Williams' expectation that
40 Gbps interfaces are likely to cost only 100% more than their 10 Gbps
counterparts, deployment within this segment makes sense. It should be noted
that this commentary is similar to that heard on the ONI Systems' most recent
earnings call.
From SSB 2/14/01
Jack |
