Telecommunications carriers may be cutting back on purchases of circuit switches and legacy transmission equipment, but they are shelling out billions of dollars for high-end routers and optical networking gear in 2001 in hopes of cutting operating costs and supporting new revenue- generating services.
Several manufacturers of the routers and optical equipment were so positive that the trend will continue that they told securities analysts to raise revenue estimates for 2001, based on orders and strong sales in the final months of 2000.
"Data revenue for carriers is growing at least 30 percent globally and it follows that they are going to spend on IP [Internet Protocol] or data-related gear," said Tim Savageaux, an analyst at WR Hambrecht & Co. He said the Federal Reserve Boards interest rate reduction in January is also making it easier for carriers to raise capital.
Avici Systems, Juniper Networks and Redback Networks — suppliers of high-speed routers, and service management and optical gear — turned in double- and triple-digit revenue growth rates for the fourth quarter.
Extreme Networks revenue grew 21 percent from the previous quarter, and was up 163 percent compared with the same quarter a year ago. Savageaux said Extreme derives a good piece of its revenue from enterprise customers that have reduced information technology spending.
Juniper beat analysts earnings and revenue estimates by wide margins, reporting $295.4 million in fourth-quarter revenue, up 47 percent from the third quarter — and 550 percent compared with the fourth quarter of 1999. Its net income of $62 million was 20 times greater than the $3 million reported a year ago. Juniper raised estimates for the coming year to between $1.5 billion and $1.6 billion from earlier projections of $1.3 billion to $1.4 billion.
Avici, which began shipping its terabit router last summer, said its $8.8 million fourth-quarter revenue was up 102 percent from third quarter. The company lost $18.4 million in the quarter.
Paul Brauneis, Avicis chief financial officer, said the company has more visibility into its customers purchasing plans this year and raised revenue estimates. For the first quarter, revenue should be between $13 million and $14 million, and top line for the whole year between $85 million and $90 million, he said. Avici is comfortable with projections that it will break even in the second half of 2002, he added.
There was a similar story at Redback. Its sales of subscriber management and access optical gear rose 339 percent to $114.6 million compared with 1999s last quarter, and 42 percent from the third quarter. Vivek Ragavan, president and chief executive, said the company shipped all the SmartEdge optical access equipment it could produce. CFO Craig Gentner raised revenue estimates for 2001 to $735 million from $645 million.
Redbacks stock was downgraded by a number of analysts after its presentation because of concerns about its gross profit margin and the companys unwillingness to give detailed information on the sales of each of its products. Clifton Gray, a securities analyst at Kaufman Bros., noted that Redback is locked in battle with Cisco Systems over the access optical market, and apparently did not want to disclose information that Cisco might use to gain competitive advantage.
Carriers are migrating their networks to a new architecture that is more efficient and able to provide new services with higher margins, such as video-on-demand, said Surya Panditi, co-chairman and CEO of Avici.
As a result, carriers are once again selling high-yield bonds to finance their operations. Adelphia Communications, Charter Communications, McLeodUSA and XO Communications have all raised money by selling bonds, noted Conrad Leifur, an analyst at US Bancorp Piper Jaffray.