The Daily Interview: Tellium's CEO on the Optical Switch Market
Tellium
(TELM)
has a tall order: It wants to escape
Ciena's
(CIEN) - Get Report
shadow.
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The optical switching shop first earned widespread notice when it came public this spring. Founded in 1997 by a bunch of
Lucent
(LU)
,
AT&T
(T) - Get Report
and
Telcordia
veterans, the optical switch developer didn't make much noise until its May 17
IPO. At Wednesday's close of $19.45, Tellium shares were 30% above their IPO price.
Now that the excitement has died down, Tellium's greatest challenge is to find a way to win business with Ciena dominating the optical switch market. Ciena has 15 customers; Tellium has three:
Qwest
(Q)
,
Cable & Wireless
(CWP)
and
Dynegy
(DYN)
.
But Chairman and CEO Harry Carr is trying to define Tellium's switch as complementing, rather than competing with, Ciena's. Optical switches are highly complex devices that select pathways for light waves riding on optical fiber. They're the brains that manage networks.
The knock on Tellium, according to skeptics, is that it's selling one incredibly specialized product to a very small market in a spending downturn. Carr agrees, but insists he likes his chances.
TSC: You have three customers and $1 billion in backlog orders. When will you be able to announce new customers?
Harry Carr:
That's the toughest thing to predict in this current environment. By its nature, the kind of product we sell has a long sales cycle, anywhere from nine to 18 months, because it's going into the core of the network. When we do win a customer it means we're going to be in their network for a long period of time. There are carriers that will be making their decisions this year, and obviously we hope to win some of that business.
TSC: You have a large core switch that does a big job for big networks. That makes your market, by definition, small. There just aren't that many networks out there that need a switch like yours.
Carr:
There are probably more networks than you may believe. We fit in the network anywhere fibers are coming together from multiple directions. If you think about it, there are an awful lot of carriers with a lot of central offices that can use our equipment. It's at least a three-digit number of offices that are candidates for our switches. Think of it this way: We have three contracts, and that's a $1 billion commitment out of just those three carriers alone. It doesn't take that many customers to have a pretty robust business.
TSC: Who's buying?
Carr:
Our primary target customers are the largest carriers in the world, the top 25 carriers in the world. Those are the people with the most substantial fiber networks, and those are the kinds of people we offer the most value to. The
competitive local exchange carriers, a.k.a. small phone companies have never been our targets. The long-distance and long-haul people both here and abroad are the folks we are going after. On a secondary basis, we will go after some of the upstarts, but it's really the bigger carriers we are focused on.
TSC: What advantage does your switch bring?
Carr:
Compared to the equipment out there now, we typically take 90% less space. What usually takes 40 bays
floor to ceiling equipment racks of conventional equipment to provide the capacity, we can provide in four bays.
We also give the carriers the ability to do automated restoration and provisioning. Today, if they want to provision services, they have to dispatch technicians to every central office between two points they want to provide service to and add rows of equipment. We give them the ability to point and click on the two endpoints, and within seconds they can create a new light path across the backbone of a carrier's network. Not only is that a tremendous savings on operating expenses, but it also saves capital costs.
TSC: Power conservation seems to be a plus, also.
Carr:
Absolutely. Not only does our switch configuration use 90% less space, it uses 60% to 70% less power than the equivalent conventional equipment. That's a big deal for carriers.
TSC: You've given stock to customers in exchange for purchase commitments. Will vendor financing be another option you might use to gain more customers?
Carr:
I spent 18 months at Lucent. Vendor financing is not something I want to do anytime soon. One thing I learned after 20 years in this business, you don't rule anything out. But I don't see a need, and if you think about our current customers, they don't need it. We go after companies that have strong balance sheets.
TSC: How do you cope with the spending slowdown?
Carr:
We haven't seen a real direct impact from it, either from our existing customers or from the people we hope to close as customers over the next many months. I think there are two reasons for that: Optical is something people are still going to invest in, and the demand is still there.
And second, specifically for us, we can add value to a carrier incrementally. With as few as four switches in the network, they start getting the benefits of automatic restoration and provisioning.
Those kinds of economics are a very compelling value proposition. Even the folks that haven't made a decision yet understand those economics, and they are still marching ahead. They understand that they almost need to do this to get through the capex crunch, if they expect to live through it.
TSC: One of the current investment themes on Wall Street is that metro, or the edge of the network, is hot, and that the core is a forbidden zone. Too much has been spent on the long-haul fiber construction, and there's an overcapacity of bandwidth and bandwidth providers. If the core is the last place anyone wants to put their money, it can't be good for you folks who sit squarely in the middle of that.
Carr:
There's been an ebb and flow that's gone on between the edge and the core ever since I started in this business. First the bottleneck is in the core, and then people build out more capacity. Then the bottleneck is at the edge, so people build at the edge, and quickly the bottleneck is back to the core.
This is a six- to 12-month debate, and I'm not sure either extreme is ever really true. The fact is, people will continue to invest in both the edge and the core, and they will do it to meet their customers' needs. The reality is, the more they invest in metro, the more they will need our product at the core.
TSC: With one product, you don't benefit from the swinging pendulum. Do you consider adding a metro or transport product?
Carr:
No. We are very much focused on the core. I'm a strong believer in focus. I've been at two large companies, and I've seen the power of focus. We are much closer to a
Juniper
(JNPR) - Get Report
model, where we can scale our product up or down as customers demand, as opposed to trying to be a portfolio or end-to-end company.
TSC: One of the raps on you folks is that you can't scale down to the smaller streams of traffic.
Carr:
People are investing millions of dollars in high-capacity routers. There is no rational reason in the world why in the middle of that you would need to put a smaller-stream switch. The core of the network needs OC-48
2.5 billion bits of information per second and OC-192
10 billion bits per second switching, and that's what we do.
TSC: Ciena is believed to offer the full package. They say their CoreDirector can be used to switch traffic all the way down to the small pathways and all the way up to the largest. Why would anyone go to someone other than Ciena?
Carr:
That's the fallacy: They don't do what we do, and we don't do what they do. Their switches, which, by the way, are very complementary to ours, do small switching and grooming
allocating pathways. Their switch doesn't do OC-48 and 192 grooming.
Ciena disputes this, saying several customers use the Ciena switch for this purpose.
Ciena's CoreDirector is a great edge optical switch and there's a big market for it. They're going to beat the heck out of
Tellabs
(TLAB)
-- maybe it's their revenge for the failed merger a couple years ago. But it's not a core optical switch.
TSC: One last question: Your company has every appearance of a ripe takeout target for some outfit that wants in on the optical switching tech race. Is that one of the options?
Carr:
We built the company to try to be a great stand-alone company. Getting bought out is not something we really spent any time focused on. We focused on making this a public company, and now that we are a public company, continuing to build long-term shareholder value.
I've been acquired before, and I've bought companies. There are companies that have for-sale signs on them, but we are focused on building a great business. What happens beyond that, I don't spend much time focused on.