A Supercomm Day 2 assessment from Goldman Sachs

Up-to-the-minute news, analysis and observation.

By Jim Duffy
09:13 AM EST

On the 2nd day of SuperComm, there was no stock impacting news. The general theme continues to be weak carrier spending and low visibility. We believe there is risk that overall capex could be down seq. in Q2. While spending remains very constrained for the intermediate term, our conversations with carriers indicate that IP backbone traffic continues to grow 70-100% per year and priority areas of spending include IP routing and metro/access. The enterprise units of vendors appear to havemore stable biz trends and could experience moderate seq. growth.

Day 2 of the Goldman Sachs SuperComm 'Conference Within a Conference'
featured meetings with the management teams of Cisco, Ciena, ONI Systems,
NetScreen and ADC. Here are 10 key takeaways from our meetings on day 2 of
SuperComm.

#1 CARRIERS CONTINUE TO FIND WAYS TO ADDRESS CAPACITY NEEDS. Our
conversations with both carriers and equipment vendors indicate that while
data traffic growth remains strong, carriers continue to find creative ways
to address growing capacity concerns by 1) working through all inventory of
both chassis and line cards, 2) redeploying previously deployed network
assets to more capacity starved sections of the network, and 3) rerouting
traffic through more capacity rich sections of the network.
This ability of carriers to sweat network assets will allow them to address
any near-term transport capacity concerns and conserve capital for the near
term.

#2 IP TRAFFIC CONTINUES TO GROW AT IMPRESSIVE RATES. Our discussions with
major carriers with global IP backbones indicate that IP traffic continues
to grow at 70-100% per year. Carriers indicated that while this rate has
been somewhat higher for some periods of time, the average rate over the
last 4 years has been around similar levels.

#3 METRO/ACCESS AND IP INFRASTRUCTURE ARE SPENDING PRIORITIES. Our
conversations with carriers indicated that spending is strictly success
based in the current capital constrained environment. While overall
spending remains weak, carriers identified spending on DSL, IP VPNs and IP
based multiservice edge aggregation and switching as relative spending
priorities since these purchases are directly linked to turning up
customers and reducing operating costs. We believe that spending on
network backbone will remain very weak - transport is likely to be the
hardest hit and the limited spend will likely be focused on optical
switching to manage the large amount of bandwidth in the core and IP
routers to support the continuing robust growth in IP traffic.

#4 RBOCs LIKELY TO BEGIN IP INFRASTRUCTURE DEPLOYMENT IN LATE '02/ EARLY
'03. Based on our dialogue with carriers we continue to believe that the
US RBOCs are in advanced stages of evaluating IP routing solutions and are
on track to make vendor decisions in 2H'02 and begin initial deployment in
late '02/early '03. IXCs have traditionally been the primary buyers of
routers while RBOCs have represented a very small percentage of overall IP
buying limited to the edge of the network inspite of representing over 50%
of US wireline capex. While the timing and scope of a major IP deployment
will depend on various factors including timing of 271 relief and network
build vs. buy decisions, we believe that the decision made by RBOCs to
build IP networks is a very important long-term positive for leading router
vendors Cisco and Juniper. We are anecdotally hearing of 2 RBOCs running
first office applications for core routers which we would interpret as an
indication of significant interest and commitment from RBOCs. We believe
that the initial vendor decisions and deployments will be for core routers
in late '02/early '03 followed by IP based multiservice edge vendor
decisions in 1H'03.

#5 METRO OPTICAL SALES TO INCUMBENTS LIKELY LEAD BY MSPP BOXES; DISASTER
RECOVERY IS A NEAR-TERM OPPORTUNITY. We believe that the incumbent
carriers will focus initial purchases of next gen optical equipment on next
gen SONET or MSPP (Multi Service Provisioning Platform) boxes. Our checks
indicate that RBOCs currently have large outstanding RFPs for MSPP boxes
and deployment of this equipment will likely begin in 1H'03. While Cisco
is the market share leader in the MSPP space with their Cerent platform, we
believe that incumbent SONET ADM vendors such as Nortel, Fujitsu and Lucent
are developing next-gen SONET platforms and the RBOCs will choose at least
2 MSPP vendors. We also believe that metro WDMs build will follow this
deployment - Ciena/ONI and Nortel are best positioned in this market.

#6 INTERNATIONAL CARRIERS WILL LIKELY LEAD INCUMBENT ADOPTION OF NEXT
GENERATION TECHNOLOGIES. Our conversations with carriers and vendors lead
us to believe that international incumbent carriers (PTTs) will likely
deploy next generation technologies ahead of US incumbent carriers (RBOCs).
These technologies include metro optics (MSPPs and metro WDM), IP
infrastructure and packet telephony. Over the last few years, the primary
buyers of these next-generation solutions have been the IXCs and CLECs.
While near-term deployments by PTTs are unlikely to be of a magnitude to
offset weakness caused by sharp reduction in spending by IXCs and CLECs, we
believe that incumbent adoption and deployment of these next-gen solutions
is a key initial milestone for the long-term success of both these
solutions and the vendors that provide them.

#7 LOWER ATTENDANCE; HIGHER PERCENTAGE OF INDUSTRY PARTICIPANTS. While
overall attendance at SuperComm 2002 was clearly down from the past couple
of years, we did hear from vendors that the percentage of attendees that
were customers or partners, versus financial/industry analysts and press,
was up significantly this year.

#8 CISCO - AN OPTICAL UPDATE. We met with Jayshree Ullal, senior vice
president and head of Cisco's optical division. Cisco's 5 areas of focus
are carrier class platforms, SDH, multi-protocol and multi-service
functionality, creating a 'souped-up ADM', and intelligent metro WDM
platforms. The key target markets for intermediate-term growth are the
enterprise market, cable, international markets, and the domestic
incumbents.

Consistent with industry trends, Cisco stated that while long haul optical
is very weak and is not expected to rebound in the intermediate term, metro
has more or less been bouncing along a bottom since the October 2001
quarter. Near-term, Cisco believes that its next-gen SONET product has the
most potential for growth. Clearly, RBOCs and PTTs remain the most
important customers in this market, and as the market share leader in next-
gen SONET with its 15454 platform, Cisco is well positioned to compete with
incumbent vendors from a technology perspective. However, Cisco stated
that it is in the process of making significant improvements to the
operating system of the 15454 to meet RBOC demands to function efficiently
within RBOC networks. The RBOC deployment time frame has been pushed back
from 1H02 to 1H03 due to capital constraints and RBOC demands for
improvements to the MSPP operating systems.

Cisco discussed plans for its next-generation of the 15454, which has been
in development for 18 months. The platform will be a 'souped-up' ADM,
which will be able to aggregate Cerent platforms, and do sub wavelength
grooming but will not contain mesh-networking capabilities. Thus, the
product is not expected to compete directly with Ciena's CoreDirector.
Cisco also stated that it will soon introduce SDH capabilities for the
15454, opening up large market opportunities in Europe and Asia. Other
product focus areas include metro WDM and metro ethernet. Cisco indicated
its belief that it has about 10% to 15% share of the metro WDM market - it
is however important to note that most of these revenues come from
enterprise customers and managed service providers rather than traditional
carriers.

Additionally, Cisco stated that 10% of the 15454 ports shipped were
Ethernet ports (about 30,000), and that there has been a renewed interest
in fiber channel over SONET due to disaster recovery initiatives driven by
9/11.

#9 NETSCREEN REMAINS BULLISH ABOUT ITS NEAR-TERM AND LONG TERM
OPPORTUNITIES. In contrast to the cautious near-term tone of most commtech
vendors, NetScreen continues to be positive about its near-term growth
opportunities, business pipeline, new product traction and win rate.
Specifically, the company stated that it remains very comfortable with its
guidance for June quarter sequential revenue growth of 7%-9%. The company
also indicated that the business pipeline is the healthiest it has been in
the history of the company and win rate continues to increase.

With regards to customer verticals, NetScreen indicated that RFP activity
with the government is strong and indicated that it has recently won a
major contract with the department of defense. Other strong verticals
include investment banking, retail banking, automotive and retail.
Finally, the new high capacity NS 5200 platform, which was introduced in
April, continues to get strong traction, exceeding initial expectations.
NetScreen indicated that the 5000 series of products, which include the
5400, which will ship in the September quarter, could represent over 10% of
revenues by the December quarter of 2002.

#10 CIEN/ONIS - INDICATING THAT CURRENT CUSTOMER SPENDING LEVELS ARE BELOW
SUSTAINABLE LEVELS. Ciena and ONI expect to complete their proposed merger
shortly after the June 18th shareholders meeting. Ciena continues to
believe that current customer spending levels across its product portfolio
are below sustainable levels, and the company will continue to operate with
a revenue breakeven level substantially above its current sales level
(Ciena stated that the combined CIEN/ONIS infrastructure allows for
breakeven around the $250-300 mln level compared to the $87 mln in CIEN
April quarter sales and $20 mln in ONIS March quarter sales).

Visibility into the timing of such a sales rebound remains very unclear.
We believe the recovery will be lead by switching products, which represent
over 50% of sales, and metro WDM. We would expect RBOCs to begin the
deployment of next-generation SONET in 1H03, followed by the deployment of
metro WDM platforms.

Additionally, ONIS stated that European PTTs are experiencing increasing
demand from enterprise customers, particularly financial institutions
driven by disaster recovery and storage requirements. Finally, Ciena
hinted that it will attempt to incorporate transport functionality into the
CoreDirector.

Long haul transport is expected to continue to stay weak in the
intermediate term. While Ciena did state that a couple of large customers
have talked about resuming long haul builds and AT&T has an RFP out for a
long haul deployment next year, there is no expectation of a meaningful
rebound in long haul transport before the end of 2003.

SuperComm 2002 Weblog Archives

Contact Edge Managing Editor Jim Duffy

Contact Senior Editor Tim Greene

Apply for your free subscription to Network World. Click here.

Request a reprint or permission to use this article.

Send this article to a colleague