Smaller optical gear makers riding high

A handful of fiber-optic equipment makers have posted solid earnings in recent weeks and voiced optimism about their prospects for growth, despite lingering concerns that communications carriers will cut their spending on new hardware.

The bullish quarterly reports and new products from companies such as Ciena, ONI Systems, Sycamore Networks and Corvis could serve to rekindle investors' hopes that Internet and telecommunications equipment stocks will rebound this year.

"The bigger you are the harder it is to navigate these tougher macroeconomic waters. Whereas if you're focused on one or a small number of target areas you can do quite well," said Tim Savageaux, a senior equity analyst at WR Hambrecht, an investment bank.

Many optical equipment stocks slumped in recent months as companies such as Nortel Networks, JDS Uniphase and Lucent Technologies warned of slower growth or announced restructuring plans.

Nortel Thursday warned of an earnings shortfall for its current quarter and slower growth for the entire year, blaming, in part, a slowdown in the U.S. economy.

Savageaux said the narrow focus of many of the nascent optical companies such as ONI has allowed them to "blow out the numbers" even though communications capital spending, valued at roughly $100 billion annually, is only growing by 5 percent annually, down from 30 percent in recent years.

"Nortel, JDS Uniphase and these bigger guys are pretty broadly exposed to today's optical equipment and tomorrow's next-generation technology," he said. "What you're hearing is a divergence between smaller players focused on new technologies and those who have a broader exposure in terms of products and customers."

The entrenched Ciena, which posted strong first fiscal quarter earnings and boosted its revenue growth projections Thursday, has been something of a bright spot in otherwise dark times for the communications equipment sector. Stock in Ciena went on a tear for much of the latter half of 2000. Ciena shares gained more than 20 percent Thursday and have traded as high as $151 and as low as $39.63 in the past year, though the stock has dipped some since a December high.

"Even in this uncertain environment, guys who are focused on niche markets can do well," Savageaux said. "Despite the strong earnings, we've seen some compression in their valuations due to the macroeconomic climate. That's why these stocks aren't making new highs, though they would be in better economic times."

Optical technology allows telecommunications companies to send huge chunks of traffic, both voice and data, over single strands of fiber no thicker than a human hair. Technology innovations have brought down the costs of such equipment and, in some cases, altered the spending patterns of the telecommunications industry, according to equipment executives.

"There's a pretty significant shift in the spending habits of carriers," said Denny Bilter, senior director of marketing for Ciena. "What's essentially happening now is the carriers are investing in the newer architecture rather than the older technology."

Other optical industry executives agree that the fiber-optic networking market is changing as carriers embrace newer systems from smaller providers. Some liken the shift to when the computing market changed from mainframe computers to desktop PCs.

"There's a transition in the industry. The world is really moving from building (networks) the old way to a new way," Sycamore Networks Chairman Desh Deshpande said. "That kind of value only comes from the younger players.

"The optimism is based on looking at the future," Deshpande said. "It's very clear that the infrastructure has to get built, and it will be built the new way. The opportunity is there."

Long-haul and optical switching equipment makers such as Ciena, Corvis and Sycamore have done well by developing specifically tuned products to speed the networks and reduce costs for their telecommunications carrier customers.

Others, such as ONI Systems and Sycamore, have also capitalized on the intense demand for gear designed for metropolitan area networks. The ?last mile? connection to business customers has been underdeveloped in recent years, and carriers and their suppliers are scrambling to capture the local market.

Analysts believe those are two of the hottest areas in optics today.

Demand for core optical long-haul products and metropolitan area systems will remain strong this year, though tougher times may lay ahead for "experimental technologies" and optical component makers, especially in the first half of the year, according to recent research from Hasan Imam, an analyst at merchant bank Thomas Weisel Partners.

"While equipment spending overall may be slowing, robust end demand, immediate cost saving and performance enhancement continues to drive spending on core optical systems," Imam said. "(Our analysis indicates) that demand for metro equipment is humming."

The optical equipment makers have posted solid quarterly results. But it's the surprisingly optimistic tone that many of the recent analyst calls have taken, and bold plans for new products, that have impressed industry observers and driven share prices higher recently.

For example, at a San Francisco investor conference Wednesday, Corvis Chief Financial Officer Anne Stuart told attendees that the company, notorious for having gone public with no revenue and few customers, may be able to sign another one or two customers during the first half of the year.

Stuart also said Corvis intends to introduce a new optical switching product that can carry data at multi-terabit speeds by the end of 2001. The switch will be designed for the edge of core Internet networks, and could serve as an indication of Corvis' desire to migrate from the ultra long-haul market toward regional and metropolitan networking needs.

And ONI Systems is believed to be detailing its product plans for analysts at a private briefing Thursday. The company, which develops metro area networking gear, is expected to reveal its technology plans for coming quarters.