Robbie Stephens Conference: Loose Lips Float Corning's Hidden Dragon

SAN FRANCISCO -- So Corning's (GLW) got a hidden dragon. And the optical component industry may well have a crouching tiger as well, in the form of a potential big-money order.

During a question-and-answer session here at the Robertson Stephens Technology 2001 Conference Wednesday, Corning CEO John Loose was asked why he thought cash-strapped service providers were still going to buy gobs of his fiber and components this year. He didn't specifically cite the sweeping new martial arts epic, but investors came away with the distinct impression that Corning's got some kick left. Its shares jumped 8% Thursday, riding a Ciena (CIEN)-inspired rally across the networking sector.

Glass Houses

Loose repeated what has become the industry's party line, that optical was the future and carriers would be foolhardy not to shift spending accordingly. Until now, that had been more theory than fact, but Loose shared some evidence that had a room full of investors eagerly jotting down notes. Loose said he'd been talking to a customer that spent $500 million on optical gear last year and has earmarked a 10-fold increase -- $5 billion -- for optical gear this year.

He didn't identify the customer, but the pattern and dollar total fit either Sprint (FON) or more likely the Baby Bell SBC (SBC). SBC officials couldn't be reached to comment.

But if it's SBC, the nation's No. 2 local phone company could be spending on a new optical fiber backbone in anticipation of its entry into long-distance service. That would translate into a windfall for fiber cable, transport equipment and switching gear sellers.

Equipment spending by the big network builders is projected to be flat this year, but that $60 billion to $70 billion the major telcos are looking to spend will have to land somewhere. "Hey, having anyone say they are spending 10 times more than they did last year is a major event," said one fund manager who spoke on a condition of anonymity, and who trades many of the optical stocks on a short-term basis.

Loose Lips

But perhaps even more provocative than big spending in the optical shop was the topic of "dragon," which was introduced by an astute West Coast fund manager in the form of a one-word question uttered almost sotto voce during Corning's Q&A session. Corning's Loose, in theatrical fashion, perked up at the question, and enthusiastically clarified for others in the room that "dragon" was the code word for a new generation of Corning fiber in development, adding that it was still hush-hush.

Corning's talent is obviously in glass, given its lineage. The company has introduced generation after generation of fiber optical cables, each progressively thinner and more pure, which has served to boost the basic physical capacity of networks. Corning has essentially one competitor in fiber: Lucent (LU). And given Lucent's tragicomic missteps, Corning stands to gain significantly if the new fiber introduction is successful.

A Corning spokesman said dragon is a proprietary project with no planned introduction date, but that there was a slight chance it would be unveiled by the end of the year.

But now, with Nortel's (NT) warning after the market's close Thursday, these lovely vignettes will again get drowned out by the larger issues facing the industry.

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