08:16am EDT 16-Apr-03 Thomas Weisel Partners LLC (Imam, PhD,Hasan
212.271.3698
GIG-BE Breathing Life Into Optical Networking?(Part 1 of 2)
Story 2233 (B/DY, C/CNA, C/CUS, CIEN, CIEN.O, CORV, CORV.N, CSCO,
CSCO.O...)
April 16, 2003 Thomas Weisel Partners LLC
Communications Equipment-GIG-BE Breathing Life Into Optical
Networking?
Hasan Imam, PhD 212.271.3698 himam@tweisel.com
Bobby Sarkar 212.271.3582 bsarkar@tweisel.com
Michael DeMichele 212.271.3798 mdemichele@tweisel.com
CIENA Corporation (CIEN: Peer Perform, $4.26)
Cisco Systems, Inc. (CSCO: Outperform, $13.34)
Corvis Corporation (CORV: Suspended Rating, $0.69)
Juniper Networks, Inc. (JNPR: Peer Perform, $9.98)
Lucent Technologies (LU: Peer Perform, $1.49)
Tellium, Inc. (TELM: Underperform, $0.57)
Ratings System
Sector Ratings
OW Overweight MW Market Weight UW Underweight
Stock Ratings
O Outperform P Peer Perform U Underperform
S Suspended Rating NR Not Rated NC Not Covered
Executive Summary
* Industry checks suggest US Government's optical network project on
track;
contract/revenue timing as early as 3Q03/4Q03. The US Dept. of
Defense (DoD)
has undertaken the ~$900mn GIG-BE (Global Information Grid -
Bandwidth
Expansion) project, building a secure optical + data network. We
estimate
$400-500mn could flow into selected equipment vendor top lines over 3
quarters beginning 4Q03. Potential beneficiaries, in our view, are
U.S.
optical companies Lucent, Ciena, Corvis and Tellium and networking
companies
Cisco and Juniper.
* Expect GIG-BE equipment contract announcements by 3Q03/4Q03;
revenue
recognition likely within 1H04. Our checks suggest that the project
is on
track, notwithstanding minor delays. Evidence of the DoD's
seriousness in
pursuing this project are (1) specific earmarking of ~$900mn in
funds, (2)
issuance of the fiber RFP on March 7 and (3) preliminary testing on
switching
gear. Currently, the DoD is in the fiber purchase/lease phase of the
project
and is likely to move into the equipment RFP by 2Q02. We estimate
evaluation
and contract announcement in 2H03. Equipment vendors should begin
deployment
and recognize revenue by 4Q03 through 1H04.
* GIG-BE should benefit U.S. data networking, optical transport and
switching
vendors. Declassified information on the GIG-BE's network
architecture
reveals that it will be an optical network with both all-optical and
optical-electronic-optical (OEO) switching fabrics at the core,
carrying
secure ATM/IP traffic. Based on the assumption that the government
will most
likely favor U.S. vendors for this project, we think the potential
beneficiaries in our coverage are (1) for optical transport (long
haul/ultra
long haul), Corvis, Ciena, Lucent; (2) for all-optical switching,
Corvis; (3)
for OEO switching, Ciena, Tellium, Lucent; and (4) for data
networking,
Cisco, Juniper.
* Pickup in spending from alternative sources, like GIG-BE, likely
to act as
positive catalyst for select names. With a dearth of new optical
buildouts in
the horizon, revenue expectations for optical networking related
stocks
remain low. Our view is that optical networking revenues are at a
bottom,
being sustained by maintenance level carrier spending in most
regions.
Alternative sources of spending, like GIG-BE, could create
meaningful revenue
growth in select optical names and could act as a positive catalyst
for these
stocks.
GIG-BE DETAILS
What is GIG-BE?
The Global Information Grid-Bandwidth Expansion (GIG-BE) is a joint
initiative launched by the Department of Defense (DoD) and the
Defense
Information Systems Agency (DISA). This project involves linking
roughly 90
DoD sites worldwide using a secure and dedicated IP-based wireline
network,
which would be capable of carrying voice, video and data at speeds
of 10Gbps
(OC-192). This network is expected to upgrade/replace a slower
network
currently being used by the DoD, with links ranging between DS-3 to
OC-12
speeds (for more details on network topology, please see Sidebar).
How Big Is It?
The total budget allocated for the GIG-BE project is $862mn spread
over 2003
and 2004. Of this, the government is looking to spend about $502mn
in 2003,
with the remaining $360mn to be spent next year. This total amount
will be
allocated between fiber and telecom equipment. While exact split
between the
wireline equipment and fiber portions is not yet certain, our checks
suggest
that roughly $400-$500mn is expected to go toward equipment, with
the rest
earmarked for fiber.
Our estimated breakdowns of spending on the sub-segments of telecom
equipment
are:
* Optical transport should make up 40%, or about $150-200mn. Optical
transport should include long haul as well as ultra long haul DWDM
transmission gear.
* Optical switching (both OEO as well as OOO) should make up about
20%, or
$80-100mn.
* Data networking should constitute the remaining 40%, or $150-200mn.
Sidebar
The GIG-BE network is expected to link roughly 90 DoD sites
worldwide using a
secure and dedicated IP-based wireline network. This network would
be capable
of carrying voice, video and data at speeds of 10Gbps (OC-192). GIG-
BE is
expected to upgrade/replace a slower network currently being used by
the DoD,
with links ranging between DS-3 to OC-12 speeds.
On the optical side, the network is going to have a two-tier
architecture
consisting of the following.
1) An all-optical "expressway" network with ultra-longhaul transport
and
all-optical (OOO) switching. This part of the network is most likely
going to
be used for highly sensitive data transmission, as optical signals
cannot be
spied on, unless they are converted back into electrical signals, as
would
typically be the case in an OEO network.
2) An optical network with OEO switches, which will be used for less
sensitive data transport. While OOO switching provides for secure
communications, it lacks intelligence and resilience, prompting the
use of
OEO switches that can groom and direct traffic on a much more
granular basis.
Transmission on this portion of the network is likely to be handled
by
long-haul DWDM gear.
On the data side, GIG-BE is going to have both ATM switches and IP
routers,
along with MSPPs. While the GIG-BE network is eventually going to
transition
to an all-IP architecture, the DoD currently plans to use ATM
switches also
in order to provide for secure communications.
GIG-BE Contract Details
Source: Thomas Weisel Partners LLC estimates.
What Stage Are We in Now, And What Is a Reasonable Time Line?
The fiber and equipment contracts will be awarded in 2Q03 and
3Q/4Q03,
respectively. It is important to note that the fiber and equipment
contracts
are separate and distinct from each other. Typically, contracts of
these
nature have the following four phases. (1) RFI (Request for
Information),
which gives the parties a preliminary sense of what is feasible. (2)
Then
there is an RFP (Request for Product), whereby vendors send in their
products
to be evaluated. (3) After this, the customer usually conducts lab
testing,
live network testing, etc to finalize vendors. (4) Actual deployment.
Below we detail the status of the fiber and equipment contracts.
* Fiber contract. The RFI was sent out mid-2002, and 24 companies
have
responded to it. After reviewing the preliminary materials submitted
by
various fiber vendors and service providers, the government let out
the fiber
RFP recently on March 7. We expect that the final contract grants
will take
place in the second quarter of this year. It appears that the
government can
choose up to nine fiber suppliers.
* Equipment contract. Like the fiber contract above, the equipment
RFI was
also released in mid-2002. Overall, the government has received 76
responses
to its RFI. While, originally, the equipment RFP was expected to be
released
in 1Q03, this has obviously been delayed into the second quarter of
this
year; we expect this RFP to be issued shortly. The final award
grants are
expected in 3Q03/4Q03.
We believe that the equipment installation will start within a
couple of
months after the final contract awards are doled out or in late
2003/early
2004. Thus, this network is expected to be up and running by mid-
2004 at the
latest.
GIG-BE Time Line
Source: U.S. Government
LIKELY BENEFICIARIES ON THE EQUIPMENT SIDE?
Our analysis suggests that the DoD is likely to favor US companies.
Given the
product segments that these companies play into, we think the
following names
within our coverage group could potentially benefit from this
project.
Data
* Cisco. Cisco enjoys the #1 position in IP routing and has strong
ATM
switching capabilities. But more importantly, the company is very
well
connected in the government-CEO John Chambers is close to the Bush
administration and has a strong lobbying presence in Capitol Hill.
* Juniper. As a strong second source to Cisco in IP routing, Juniper
could
also possibly benefit.
First Call Corporation, a Thomson Financial company.
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