How can Ciena feel good about its place in the network equipment world when its stock has plunged about 60 percent from a 52-week high of $151 per share?
Because its chief competitors have fallen much farther: Sycamore Networks, 95 percent; Lucent Technologies, 85 percent; Nortel Networks, 82 percent; Cisco Systems, 79 percent; and Juniper Networks, 76 percent.
Ciena is the leader in a potentially huge new product category — wavelength routers, the computers that serve as the intelligent switches at the core of optical networks. The market is expected to grow to $5.7 billion in 2005 from $76 million last year, industry researchers at IDC say.
Already, Cienas CoreDirector wavelength router accounts for about 10 percent of its revenue. In the quarter that ended Jan. 31, Ciena reported net income of $54.1 million on revenue of $351 million.
Ciena, based in Linthicum, Md., was founded in 1992 and was first to market with a system that divided an optic fiber into 16 different wavelengths, each capable of carrying its own voice and data traffic.
Eventually, Ciena executives realized that "just adding capacity wasnt enough," says Ciena Chief Technical Officer Steve Alexander. The company needed an intelligent switch.
A $7.1 billion merger with Tellabs, which had the technology for such a switch, was called off in September 1998, leaving many observers predicting Cienas demise. But six months later, Ciena paid $552 million for Lightera Networks, developers of the CoreDirector intelligent optical switch.
In November 1999, Williams Communications became the CoreDirectors first customer. Qwest Communications International signed on in May 2000; McLeodUSA and Level 3 Communications became CoreDirector customers last February.
Thanks in part to CoreDirector, named Product of the Year last week at Networld+Interop in Las Vegas, Ciena now has 3,500 employees and plans for new plants in Linthicum and Atlanta.
Ciena has won numerous awards for its assembly and testing processes. At its original Linthicum plant, assemblers follow step-by-step instructions on computer screens. Videos remind assemblers about the precise steps for cutting fiber, polishing connections, splicing and testing. Its manufacturing control system uses gateways that wont let the product roll forward in the assembly process if there is a problem.
"Many companies claim they have a great system, but cant produce," says Ciena spokesman Aaron Graham. "Most companies are good at lab tests, but few are good at production technology, where Ciena excels."
Several of Cienas competitors have announced wavelength-router deals with next-generation carriers, potentially worth hundreds of millions of dollars. But except for Nortel and its OPTera Connect line, those deals mostly remain in the on-deck circle, rarely showing up as revenue.
Last month, Cisco decided to scrap the wavelength router that it had been developing with Monterey Networks, which it acquired in 1999 for $500 million. "The market simply hasnt taken off as fast as we had hoped," says Carl Russo, group vice president of optical networking at Cisco.
But carriers such as Broadwing, Genuity, Qwest and Williams are deploying Cienas CoreDirector.
Alexander says the difference is that CoreDirector is the only one being sold today that can switch traffic at the subwavelength level.
Wavelength routers arent really routers, and are sometimes called optical switches or optical cross-connects. Routers typically inspect every packet of information so they can be forwarded in the right direction. The new product switches wavelengths without inspecting packets.
Service providers are begging for a product that will let them provision extra bandwidth for customers in minutes, rather than in months. If the product can "groom" — provision in small increments so the customer gets just what is needed — that saves money and is a service for which end users will pay a premium. Cienas CoreDirector can quickly provision just the bandwidth needed, in increments of 50 megabits per second — much more "granular" than the traditional choices of 155 Mbps, 2.5 gigabits per second or 10 Gbps.
Corvis sells an all-optical cross-connect that works best on cross-continent trips when much of the traffic simply bypasses heartland cities. Ciena, Sycamore, Tellium and, until recently, Cisco, use a process that converts the optical signal to electric signals for processing, before converting it back to optical.
Ciscos Monterey wave router, like Telliums, could only switch wavelengths. If the traffic on a wavelength comes in at 2.5 Gbps, it goes out at 2.5 Gbps or 10 Gbps. Customers using Ciscos or Telliums products would also need costly Synchronous Optical Network (SONET) add-drop multiplexers at the core to squeeze traffic onto narrower pipes and achieve that desired granularity.
Because CoreDirector can switch as little as 50 Mbps at a time, carriers using it dont need SONET devices, and can save money. "Ciena is the only company delivering that now, and thats why they are gaining rapid market share," says Sterling Perrin, senior research analyst at IDC. "Its the reason Cisco dropped out of the market."
Sycamores wavelength router has Cienas grooming ability, but its SN 16000 is late to market because of technological problems and a shortage of components, Perrin says. "They had a huge drop in revenues" last quarter, as several customers canceled pending deals. 360networks, BellSouth, Enron and Williams have all announced deals for the SN 16000 optical switch, but few have been deployed.
Nortels OPTera Connect line offers an end-to-end suite of optical switches from the access edge to the metro and the backbone that manage wavelength switching. Astral Point Communications is developing a platform that puts a wavelength router, Dense Wavelength Division Multiplexing device and a SONET switch in a single box, saving real estate and component costs.
Enterprises save time and service providers save money by using wavelength routers. If a customer calls a legacy network that uses a SONET ring architecture and requests 2.5-Gbps service, it can take three or four months to dispatch technicians, pull wires and upgrade cards through the network. Wavelength routers do that same work with software. If a customer asks for a 10-Gbps pipe from Los Angeles to New York, its just a few clicks away.
Cienas CoreDirector includes both a pure optical switch and an optical-electronic-optical switch, in which the optical information is converted to electronic to make the switch, then converted back to optical. Pure optical switches can switch whole fibers or single wavelengths within those fibers. To switch at the subwavelength level requires conversion to electronic, Cienas Alexander says.
Its that ability to switch at the subwavelength level, provisioning just what the customer needs, that allows service providers to tack on premium prices for premium services, such as guaranteed low-latency voice calls.
CoreDirector handles 256 ports, each carrying traffic at 2.5 Gbps, or 64 ports each carrying traffic at 10 Gbps. One 7-foot rack handles 100 wavelengths, a tiny footprint compared to previous generation switches.
Alexander isnt worried that wavelength routers will be usurped soon by newer technology, such as microelectromechanical systems (MEMS) optical switches, or rendered unnecessary by faster capacity such as 40-Gbps speeds.
"Forty gigs [Gbps] may come in 18 months, but it will be three years before it is as dominant as 10 gigs [Gbps]," Alexander says. Referring to MEMS, he says, "The technology is wonderful, but people are well past paying for technology for technologys sake. The tech bubble burst, but thats ultimately good, because before customers couldnt figure out what was real."