Adva CEO: How AT&T is holding Ciena ‘hostage’

Protiva

Adva Optical Networking announced restructuring moves this week after reporting a “disappointing” 2007. The optical networking vendor will close two engineering facilities and cut about 75 employees (or 7% of its staff). Adva blamed its woes on a few things: the dissolution of its partnership with Alcatel-Lucent, which became more of a competitor than a reseller, a spending slowdown among large European carriers and a decision by its new chief financial officer to be more fiscally conservative following some confusion in the firm’s financial management. On the company’s quarterly earnings call Tuesday, CEO Brian Protiva spoke out on a number of topics in response to analyst questions.

On WorldWide Packets: They’re a rock solid organization. I think Ciena bought them for two reasons: One, because they finally really got it that optical-plus-Ethernet was from the enterprise throughout the network. Two, I think their biggest customer, AT&T, had awarded WorldWide Packets an access domain RFP, which I think was strategic for Ciena because of the CoreDirector hook-in. CoreDirector is quite an old product. They need a next-gen product combined with that. They paid dearly for it, but it was strategically important for them. We compete against WorldWide Packets in the Ethernet access domain. We have some overlap with them but different product strategies. With the combination of WorldWide Packets and Anda Networks [a Ciena partner focused on circuit-bonding], Ciena competes with us head on.

On WWP’s $300M purchase price—a multiple of Adva’s market cap: I think [Ciena was] held hostage by AT&T and WorldWide Packets. A 10x revenue [valuation] in today’s world is hard to understand, but strategically I think…they’re paying for a value. They clearly understand what that value was. I truly believe it was AT&T, which represents 25% to 30% of their sales--$60 million a quarter. They had to be more strategic at AT&T. If they’re willing to give up 10% of their market capitalization to become more strategic with their largest carrier, I think it’s a good decision of theirs. I don’t think it speaks to the world that everybody’s valued at 10 times revenue.

On OEM partners: As we’ve grown, our OEM business has not grown with us over the last 12 months. The rest of our business is growing 24%. [Outside Alcatel-Lucent], our other OEM relationships have not grown. [Take] our large exposure to, let’s say, [Nokia Siemens Networks]. We have some very large carriers where we have relationships that have been built together with NSN that are not ordering according to vision and strategy presently. NSN is a great partner but one that is not particularly focused on selling Adva [products]. There is some overlap with their own technology, so they’ll try to sell their own technology wherever they can, and it’s Adva’s responsibility to make sure we direct-touch customers and help them understand the value proposition Adva has to offer. We’re doing that. The NSN relationship is just as good today as it was 3 and 12 months ago. We are strategic for them in certain accounts. Yes, we haven’t won many new accounts lately. You could say that may be indicative that they’re not really pushing [Adva’s products]. But when it’s strategic, they will push us. We need to control our own destiny with the direct-touch model, and the big service providers will come online over time.

On the European market: We have a higher exposure to Europe than any of our competitors… We spent huge amounts of money positioning ourselves [with large European carriers]…Carriers in Europe, I’ve heard from various suppliers, were conservative [in recent quarters]. You see it in [Alcatel-Lucent] and Ericsson and NSN, in their qualified statements that the large PTT in Europe is not particularly strongly investing in capital equipment like Verizon, AT&T and some of the MSOs that have a war going on at this point with no regulatory controls. Carriers in Europe are strong, they’re going to invest, but they’re going to invest step by step, maybe not as aggressively on infrastructure rollouts as AT&T…This short-term hurt could help us mid-term and long-term. AT&T doesn’t just continue outspending everybody ten to one. At some point, that will come back, and our carriers will start to spend aggressively going forward.

On PBT: PBT is absolutely an interesting technology for us. We really like the opportunity. BT [which favors PBT] is a strategic customer of ours. But we’ll address it not from a carrier Ethernet switch or routing approach. We’ll have Ethernet packet intelligence, aggregation and some switching in our transport products. We’re not moving up the data to a true Layer 2, 2.5 or 3 data product. We’re at Layer 1, 1.5 and have some Layer 2 capabilities in our architectures. And in the Ethernet access domain, absolutely, we’re going to support MPLS, we’re going to support PBT--simple Layer 2 networks across the board.

More on Ciena: Ciena has twice our engineers. They have five or six products. Their business comes from long-haul and massive digital crossconnects—bandwidth management applications. They’ve got to spend aggressively in that area…Great numbers, you guys, but CoreDirector was $70 million [in the most recent quarter], long-haul was $65 million, and metro was $31 million for the 4200. It’s not the metro that’s driving it…What is the next-gen solution for the CoreDirector? You’re moving into Cisco and Juniper territory. Do we see [Ciena] often? No. Is there overlap? Yes. Do we have more engineering on our target space then they do up to now? Yes. WWP helps them tremendously in, let’s say, the access area. We feel very comfortable with what’s on our roadmap and our focus and customer base, which I believe is far broader than theirs in the metro access space and maybe even in the metro core.

On acquisition offers: We can’t comment on that. [There’s] a lot of strategic interest in Adva. We’re pursuing our fiduciary duties.