Nortel Beware: Cisco Shakes Up the Optical Market With New Router

Cisco (CSCO Quote - Cramer on CSCO - Stock Picks) Monday broke a long silence on its widely awaited optical networking efforts, saying Worldcom (WCOM Quote - Cramer on WCOM - Stock Picks) agreed to test the Monterey Wavelength router.

Carl Russo, Cisco's chief of optical networking, also said in an interview with TheStreet.com Monday that closely held PetroNet, an emerging Englewood, Colo.-based fiber optic network builder, has agreed to buy the Wavelength router. Terms of the contract weren't disclosed, but Cisco says it will probably help finance a part of the deal. Worldcom confirmed it is testing the device but declined to offer further details.

The Worldcom and PetroNet developments show that giant Cisco, long a laggard in the hot optical networking sector, now has a product that will allow it to compete with the industry's leaders, Nortel (NT Quote - Cramer on NT - Stock Picks) and Lucent (LU Quote - Cramer on LU - Stock Picks). Stocks of optical networking and equipment stocks have skyrocketed in recent months as investors handicap winners in the latest version of Internet sweepstakes. Cisco, itself about 20% off its highs of the spring, rose 88 cents to 66.38 Monday.

Toehold

Worldcom and PetroNet are the first potential customers for Cisco's heavily anticipated optical switch, which the networking giant acquired through its purchase of Monterey last year. Optical switching is thought of as the new, bigger brains of the Internet. These $1 million-a-piece computers sit at the intersections of large Internet pipes and help direct traffic more efficiently.

The success of the Monterey switch would give Cisco a significant toehold in the telecommunications market it has been trying to crack for two years. Nortel and Lucent have dominated the traditional phone equipment sales, and Cisco has been counting on new-generation equipment -- such as the optical switch -- to gain entry to the market.

PetroNet, a 2-year-old, 20-employee firm, has plans to build a 22-city national network. It has a 50% equity partnership with Buckeye Partners (BPL Quote - Cramer on BPL - Stock Picks) to use fuel pipeline rights of way in the Midwest and Eastern U.S. for a portion of the routes.

Long Delay

Analysts and investors had expected Cisco to have a Monterey product developed and ready for prime time this year, but Cisco's Russo admitted in an interview with TheStreet.com last month that those expectations may have been too high.

In fact, Cisco has waffled on whether it will see revenue for its Monterey product this year. Analysts had expected modest sales in 2000, but Cisco has said that it probably wouldn't have any by year's end. Today, Cisco's Russo said Monterey sales will be on the books this year.

"Obviously, in Cisco parlance, these are going to be small [sales] numbers, but we will begin the process of recording revenue," said Russo.

Until recently, the battle of the new high-capacity core switching products has been waged through press releases. But last month, Sycamore (SCMR Quote - Cramer on SCMR - Stock Picks) scored a sales contract with 360Networks (TSIX Quote - Cramer on TSIX - Stock Picks). Then Ciena (CIEN Quote - Cramer on CIEN - Stock Picks) became the apparent winner of a Williams Communications (WCG Quote - Cramer on WCG - Stock Picks) switching contract, according to a glowing endorsement from Williams.

Noisy

Meanwhile, Lucent has been making noise about its competing optical switch, the LambdaRouter, but to date has not had any sales. Lucent says the LambdaRouter has had successful tests with Worldcom.

It isn't clear how far along in Worldcom trials Cisco's Wavelength router has progressed. Worldcom says it has been looking at optical switching products from several vendors.

PetroNet CEO William Cobb says he expects to receive the Cisco switch soon and will have the first leg of its network up and sometime in the first quarter of 2001. Cobb said he settled on the Cisco equipment after reviewing the performance in Cisco's labs. Cobb, a former executive with U S West, said the decision process took four to six months.