Nortel Loses Qwest Deal to Ciena

Ciena returns with a lower bid, winning an equipment contract for itself.
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Thursday's looking like another bad day for

Nortel

(NT)

.

The Canadian telecom equipment maker is scheduled to report a steep third-quarter loss after the close of trading, marking its second-consecutive massive quarterly loss. Shares, already more than 90% off their year-ago high, dropped a nickel to $5.90 Thursday.

A new and perhaps more ominous development, however, is that

Qwest

(Q)

has awarded

Ciena

(CIEN) - Get Report

all of an equipment contract that Ciena and Nortel previously shared, people familiar with the deal say. Terms weren't available, but people close to the deal say Qwest demanded a better price and Ciena complied, pushing Nortel out of the picture altogether.

Nortel representatives were unavailable for comment. Ciena and Qwest representatives declined to comment.

Unstable

The fact that ruthless customers are tearing up existing contracts and squeezing suppliers for lower prices makes an already weakened sales outlook that much more unstable. Add to that the willingness of some vendors to sacrifice profit in exchange for market share and customer relationships, and the telecom gear market is looking ever more like a graveyard.

One can hardly fault the big network builders for wanting to get some bang for their buck, of course. As Qwest President

Afshin Mohebbi said in March, "You have an incentive in this market to manage your expenditures by being opportunistic."

While this particular case of opportunism clearly means bad news for Nortel, it isn't exactly no-holds-barred good news for Ciena investors either, as price cuts will inevitably deliver lower profits down the road.

"I think we continue to hear stories like this and it will be reflected in gross margins," says a Boston-based hedge fund manager, with no positions in any of these companies.

Past as Prologue

Qwest uses the equipment, known as dense wave division multiplexing, or DWDM, to separate light waves into component colors, thereby expanding the traffic capacity of optical fiber. Upstart networkers like Ciena once rose to now unimaginable heights as investors assumed that all telecom network operators would immediately upgrade to this more advanced, more capacious network equipment. But as cash-burning new-wave network builders exhausted their funding, the demand for newer networking gear fell sharply, sending the entire networking industry into a sharp and continuing contraction.

Now, as deals dry up, network equipment makers are increasingly finding that every sale is a good sale, regardless of profit-and-loss concerns, because in a downturn success is measured less by profits (few seem to have any) and more by strength of customer list. Indeed, profits are looking like a rather lofty goal now that survival is so hard-won in the communications equipment sector.

With all this said, is it any wonder that Nortel, once richly valued for being the leader in optical-transport gear sales, is now struggling under the weight of massive losses, mountainous debt and huge job cuts? The company, which reported a $19.4 billion second-quarter loss and warned two weeks ago of a $3.3 billion third-quarter deficit, is expected to post third-quarter earnings after the close Thursday. Observers expect Nortel to offer more details of its restructuring efforts and perhaps venture some remarks about the its business outlook.

But if the Qwest deal is a decent barometer, sunshine still may not be in the offing at Nortel.