Ciena thanks Alcatel-Lucent in part for success

Ciena continues to benefit from a booming optical market, raising its annual revenue expectations today after a successful 2007. But the company said it’s also taking advantage of the difficulties rival vendors are having in integrating mergers and acquisitions.

Ciena now expects its annual revenue to grow up to 27% this year, including $35 million to $40 million in revenue from its recent acquisition, Worldwide Packets, for the eight months in which it contributes to Ciena’s 2008 fiscal year. That suggests WWP’s revenue will roughly double this calendar year compared to the $30 million it recorded for all of last year. Although WWP’s relationship with AT&T was part of the justification for Ciena’s $300-million acquisition, the company expects sales of WWP gear to AT&T to be “very very little” this year.

Ciena continues to enjoy strong demand fed by increasing network traffic and the need for more core capacity as well as migration to more packet-based technologies. The vendor reported $70 million in core switching sales in its fiscal first quarter, $65 million in transport sales and $31 million in sales of its 4200 metro optical platform.

On the company’s quarterly earnings call this morning, Ciena CEO Gary Smith also attributed some of his company’s success to the merger integration tasks distracting his larger rivals in the market, such as Alcatel-Lucent.

“While we’ve been focused on a single homogeneous vision and architecture, the challenge a lot of these folks have had is merging two or three conflicting product lines,” Smith said. “The confusion that’s created in the market and the inefficiencies in R&D are going to last for a little while. Also, a considerable part of their revenue comes from Sonet/SDH architectures, which, frankly, people are looking to move away from. As the shift continues towards converged Ethernet architectures at layer zero to three, it gets more challenging for the larger players. That’s why you’re seeing us take market share.”

However, while Alcatel-Lucent’s integration challenges have been well documented, its place in the optical market remains very strong. According to Ovum-RHK, Alcatel-Lucent’s optical revenue grew faster than the market last year (29% for the company versus 24% for the market), as the megavendor topped $1 billion in optical revenues in the fourth quarter alone.

Ciena’s revenue was much smaller, at more than $600 million for the fiscal year ending in October, but it grew much faster—63%, Ovum said.

As for Sonet migration, it is true that, for example, Fujitsu Network Communications, long a big name in the Sonet market, has seen optical revenue declines lately thanks to North American migration from Sonet to wavelength division multiplexing. But Fujitsu’s history in the Sonet space didn’t prevent it from beating Ciena to win a “converged Ethernet” optical contract from Verizon last year.

Beyond technological innovations, one of the most decisive aspects in the market is simply dependent on which vendors have their feet in the door at major carrier accounts, Smith acknowledged. These relationships with individual carriers are especially critical in a market known for its lumpiness quarter-to-quarter. For example, two North American customers contributed 44% of Ciena’s revenue in its fiscal first quarter.

“The biggest challenge we have is just the sheer incumbency that some of these players like Alcatel-Lucent have globally,” Smith said, adding that Ciena’s own incumbency in optical accounts “is what’s enabling us to credibly assert ourselves in the converged Ethernet market. We are dedicated to preserving our incumbency in this space.”