CC: OPTICAL MARKET SHARE FIGURES RELEASED: VENDORS BATTLE FOR SHARE GAINS IN A . 08:10am EST 22-Feb-02 SG Cowen Securities Inc. (ARMACOST, CHRISTIN SG COWEN Christin Armacost / Michael Jung February 22, 2002
Industry: Telecom Equipment Stock Opinion: Buy (2): Cisco ($15, target $23) Neutral (3): Lucent ($5), Nortel ($5), Redback ($3) Optical Market Share Figures Released: Vendors Battle For Share Gains In A Declining Market =========================================================================== Key Points: 1. Overall optical transmission market declined for the fourth consecutive quarter in Q4; Alcatel, Nortel and Cisco fared relatively better 2. Lumpiness in revenue for major optical vendors driving market shares fluctuations; top 3 positions changed again, with Alcatel going from #2 to #1, Nortel from #3 to #2, and Lucent from #1 to #3 3. Cisco gained share in optical, going from 3% to 4%, albeit from a much smaller revenue base compared with the leaders in this space 4. We continue to believe that the optical transport business, especially long-haul, is suffering from excess capacity at the core and capex reductions from carriers, making share gains increasingly important
Summary and Investment Opinion: The Dell'Oro Group recently released its Q4:01 market share results for the optical transmission market. The data reveals that the market continues to decline overall, with only the metro DWDM segment rebounding slightly in Q4. In comparing market share shifts among the various vendors, we believe that the results were most positive for Alcatel and somewhat more subdued for Nortel and Cisco, which gained incremental share in a declining market. We view Alcatel's success as an indication that the European carrier market is holding up better than the U.S. market. And as expected, the news was more negative for Lucent, which reported a major decline in its optical business during the December quarter. Over the next several quarters, we continue to believe that the optical transport business, especially long- haul, is suffering from excess capacity at the core and capex reductions from carriers, making share gains increasingly important. That said, we continue to favor companies with less carrier exposure and more leadership in the enterprise space, such as Buy-rated Cisco.
Market Share Summaries By Company:
1. Cisco gained some share in the quarter, albeit from a much smaller base than the other vendors. The company gained 1% to 5% in the SONET/SDH market, which includes the 15454 (Cerent) platform. Absolute revenue dollars for this product was down only slightly, compared to a larger decline in the overall SONET market. In the DWDM market (long-haul and metro), the company gained 1% to 3% and grew its revenue dollars slightly. Management believes that the current slowdown in optical plays to the company's advantage, giving it time to establish itself in this space before a recovery occurs.
2. Ciena lost share in both the long-haul and metro DWDM markets, consistent with the revenue shortfall that the company suffered in its FQ1 (Jan) quarter. In long-haul, the company lost 7% share to 12%, and in metro, it lost 5% to 17%. ONI Systems, which Ciena intends to acquire, remained the #2 vendor in metro (behind Nortel), but lost 2% to 24%. As we have discussed before, the combined company should become the leader in metro DWDM, although its share is likely to be lower than the sum of each company's share, given some product overlap in that space. In optical switching, which Dell'Oro does not yet report on, we estimate that the company continues to lead the market with about 40% share.
3. Lucent slipped one spot to become the #3 vendor in the total optical transmission market, losing 2% to 14.6%. Overall, the company's optical revenue declined sequentially 48%, versus a 26% decline for the market. Lucent's decline is in line with what we had modeled for its optical business following its December quarter results (LU's total revenue declined 27% in Dec.). The company still leads in the SONET/SDH segment, but lost 5% to 19%, and it also lost 9% to 9% in long-haul DWDM.
4. Nortel improved its market share in the overall optical transport market, gaining 2% to 15%, and surpassing Lucent to become the #2 vendor behind Alcatel. The company made this jump by gaining several percentage points in the SONET/SDH and metro DWDM markets, while giving back some share in the long-haul DWDM segment. In absolute dollar terms, Nortel's total optical revenue declined 17% versus a 26% in the overall market.
5. Redback maintained only a fractional share in the overall SONET market (Dell'Oro has yet to break-out a separate next-gen SONET segment from the overall SONET market). The company's traction with the SmartEdge 800 next- gen SONET platform has been minimal and continues to suffer from delays of customer orders.
Strong Buy (1)-Analyst expects the stock to outperform the market over the next 6-12 months. Buy (2)-Analyst expects the stock to outperform the market over the next 12-18 months. Neutral (3)-Analyst expects the stock to perform in line with the market over the next 12 months. Underperform (4)-Analyst expects the stock to underperform the market over the next 12 months. SG COWEN SECURITIES CORPORATION |