While it's no secret that the optical long-haul (LH) market is abysmally slow, it may be unfair to declare it officially dead. Recent whispers of possible LH upgrades and new builds indicate that the market at least has a pulse, leading some to adopt a cautiously optimistic attitude.
According to Jim Jungjohann, managing director, and Rick Schafer, executive director of CIBC World Markets' (Toronto) wireline components and infrastructure practice, AT&T is currently running its IP network 'hot' or at about 50% utilization, making incremental capacity upgrades a likely scenario. Analysts at Merrill Lynch (New York City) agree that an upgrade project is in the offing and could be worth $100-$200 million. Both firms believe that Corvis, Ciena, and Lucent Technologies are likely on the short list.
Analysts also anticipate LH activity from other major carriers as well. Now that Verizon has been approved by the Federal Communications Commission to offer long-distance service in 47 of the 50 states, the carrier could spend as much as $1 billion on transport this year, contends Mark Lutkowitz, vice president of optical-networking research at Communications Industry Researchers (CIR—Charlottesville, VA). He also looks for additional LH activity from SBC Communications, BellSouth, and Qwest Communications, particularly SBC. Verizon's inroads into SBC's territory took the latter by surprise, and now SBC "has to play catch-up," he says.
So can we or should we read this impending activity as a sign of recovery? Not necessarily, says Lutkowitz. Requests for proposal (RFPs) are put out all the time, but they don't always end in contracts. That said, he also believes "the demise of long-haul has been grossly exaggerated. In fact, we've been saying it's going to come back sooner rather than later."
Merrill Lynch analyst Simon Leopold is less optimistic. "When we see certain stocks run up, that's evidence that there is some speculation that there's a lot of activity, yet when we do our own research—when we talk to carriers and people in the industry—we're not seeing a level of activity to justify the movement we've seen in some stocks." There's a lot of overestimation in the market right now, he says, particularly in LH where there is still excess capacity. Carriers are likely to upgrade or install new equipment only where there are bottlenecks that need to be addressed or where a next-generation product could improve their overall operating expenditures.
Vendors that enjoy a long history with the RBOCs in particular will be the most likely benefactors of these network upgrades, including Fujitsu, Lucent, Nortel Networks, and Ciena. A newcomer like Xtera might end up in the mix, notes CIR's Lutkowitz, but in the current market environment, carriers are especially risk-averse and even more likely to lean toward the traditional suppliers.
Even RBOC-friendly suppliers remain cautious about potential LH contracts. "Our visibility is very limited, but maybe that just reflects the way our customers are working," admits John Ostaszewski, director of optical networks at Nortel (Ottawa, Ontario). "Every dollar has to be justified 10 times over before they spend it right now." While Ostraszewski reports the company was pleased with its LH performance in the fourth quarter of last year and expects a similarly positive outcome for the first quarter of this year, "it's very difficult to say that there's any sort of big recovery coming six months down the pipe," he says. "We just hope that quarter-by-quarter it's not going to get worse and we'll hold and start building. That's the mindset we're in right now."
Vendors like Nortel are also looking to the Asian market where there seems to be more greenfield opportunities. CIBC's Jungojohann and Schafer have been closely monitoring two potential opportunities in China over the past six months—one a government contract, the other a private network. "We think there's one there that might be in the $200-$300-million range," says Jungjohann. "We're holding our breath, but potentially maybe in late spring we might hear something."
Merrill Lynch's Leopold admits he's also heard all sorts of "scuttlebutt," but he cautions, "selling in China is highly competitive, so even those companies that win the sales are not necessarily making much money. The phrase we use is 'the winners lose.' You get the contract, but you lose money, which is not a good business strategy in the long-term."
According to the folks at Merrill Lynch, there will be no major uptick in the LH market this year, but it will be better than last year. In terms of carrier capital expenditures, "we expect the market will be down 5% in 2003, but this compares with a 28% decline in 2002," says Leopold. "When we look at 2003, the phrase we use is 'less bad.'"
"There might be activity out there, but Wall Street is only going to bite on some of the bigger ones," warns CIBC's Jungjohann. However, he adds, three of the RFPs rumored to be circulating—the two Chinese opportunities and the AT&T project—"could be significant enough to get investor interest."
While it's a bit too early to be talking about 2004, Leopold contends that it is the earliest opportunity for recovery. "We're not saying we're going to have a recovery," he cautions. "That's just a way of saying it isn't going to happen in 2003."