Ciena Near Big Verizon Win

Sources see a lucrative order for the CoreDirector switch.
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Verizon (VZ) - Get Report is making a shopping list for optical gear, and Ciena (CIEN) - Get Report might just have the goods.

The New York phone giant will soon be soliciting bids from suppliers for "optical cross connects," says one source familiar with the company. And though outfits such as

Alcatel-Lucent

(ALU)

and

Tellabs

(TLAB)

will likely be considered, Ciena is looking like an early favorite with its popular CoreDirector optical switch, the source says.

"Verizon has basically told Ciena what it wants, and Ciena has been putting a lot of development into what I would call a CoreDirector 2," said the source.

The so-called request for proposal, or RFP, from Verizon is expected go out this spring. Contract decisions could be made in December, the source speculates.

Both Verizon and Ciena representatives declined to comment.

After a five-year lull in the wake of the telecom collapse, demand for optical-networking gear is starting to pick up again as phone companies look for new bigger systems to help manage increasing traffic volume.

The original crop of optical-switch makers such as

Sycamore

(SCMR)

and

Nortel

(NT)

never gained wide acceptance among telcos, but Ciena's CoreDirector has managed to notch enough customer wins to stay in the game through the crunch.

The CoreDirector is still going strong apparently. In Ciena's most recent quarter, CoreDirector sales totaled $39 million, or about 23% of the company's total revenue.

The opportunity for Ciena is quite large, say analysts. Verizon is looking to increase its switching capacity in high traffic areas first by replacing electronic switches with optical gear. Given the number of electronic switches in the Verizon network, analysts estimate the potential value of the job to be somewhere between $500 million and $1 billion over a long period of time.

Each optical switch can replace about five electronic switches, says one analyst, and Verizon has hundreds of electronic switches.

As observers point out, Ciena has a bit of a leg up on the competition. It previously sold CoreDirector switches to MCI, which was acquired by Verizon last year.

Ciena shares have fallen 17% in one week after the company said its operating expenses would be going up this year. The stock was trading down 28 cents at $25.97 at midday Wednesday.