Reasons for cautious optimism
The most important factor playing in favor of Orckit, is the huge spending cycle kicking into gear within the telecom industry. For the first time in years, carriers are opening their wallets, upgrading their networks and deploying multiple packet-based services like IPTV and 3G services. Not only is the optical transport segment finally getting the attention it deserves, carriers finally realize it will take a totally new kind of optical transport networks in order to offer next-gen services in a cost effective manner. Such networks must be capable of supporting all the services and applications over one converged network.
The market for metro packet transport is growing from a handful of potential customers to dozens, including the world’s biggest operators. As a result, packet transport, which was once a niche for small companies like Orckit has moved into the mainstream, with many large vendors, including Alcatel-lucent (ALU), Nortel (NT) and Fujitsu, who are planning or already launched packet transport products. Orckit’s most apparent disadvantage is its small size, as it still remains to be seen whether Orckit can compete with the large vendors. Even if we assume the majority of tenders will be won by competitors, each opportunity pursued by Orckit is worth at least several tens of millions of $, with some exceeding 100 mil $. With a current market cap of just under 100$ mil, one win per year is enough to send the company’s shares substantially higher.
In addition, Orckit usually partners with large vendors or system integrators, which integrates Orckit’s products as part of their overall offering. In Japan it has been working with OKI and Netmarks, two of the largest local integrators, who resell the CM-100 to KDDI. Although ORCT’s management may be horrible at expectation management, it should get the credit for foreseeing the paradigm shift ahead of the rest of the market and actually doing something about it. That innovation led it to win the huge multi-year deal with KDDI, whose metro transport network can be crowned as the first and largest packet transport network in the world, with over 2000 network elements and 200 10gig rings – not bad. Only now can we realize how innovative and groundbreaking KDDI was by deploying packet transport networks already in 2004, while the rest of the operators were still trying to squeeze more out of their Next-gen SONET networks. Orckit’s management understood that being first to the party is not enough and maintained its technological lead by rigorous R&D efforts. It has been working on its second-generation product line, the CM-4000, for more than two years and hopes to have it in commercial availability next year. In recent weeks, the company has recruited more than 20 R&D workers, which represents an increase of more than 10% in their R&D workforce. That is not an easy decision for a company with almost no revenue and an alarming cash-burn rate, but technological innovation is the only thing that can differentiate the company from the rest of the market.
With Orckit remaining tight-lipped and vague about their potential customers’ identities, there is no choice but to speculate. From what the company is willing to say, the majority of evaluations are with carriers in Japan, where the need for ORCT’s solutions is much more needed due to the high fiber penetration and intense competition.
KDDI is the usual suspect. To date, KDDI ‘s network is the first and only large scale deployment of packet based metro network. KDDI has concluded its shift to a packet transport network, based on Orckit’s platforms exclusively. All of KDDI’s metro transport traffic, whether IPTV, VOIP, legacy TDM or 3G backhaul runs on that converged network. With 27 mil wireless subs and 9 mil wireline subs, this is an achievement and a powerful demonstration of Orckit’s technology. During the past quarters, KDDI purchased only small quantities of products from Orckit, which led to speculations that KDDI might dump Orckit and move to one of the large vendors. Though it is an option, Orckit’s management is constantly mentioning KDDI’s heavy involvement in the planning and development of Orckit’s second-generation product, the CM-4000. Thus, KDDI seems to be quite happy with Orckit’s solutions and it is likely to view the new platform as attractive. In recent presentations, company officials even hinted that orders from KDDI are likely to be back around mid 2008.
Softbank (SFTBF.PK) is another Japanese carrier, who is rumored to be conducting trials with Orckit’s products for more than 2 years. The carrier was expected to make a decision already in 2006, but the acquisition of Vodafone Japan in March of that year, halted the selection process. More than one year after the acquisition, Softbank will most likely start to converge its wireline and wireless networks, leveraging Vodafone’s large subscriber base (over 15 million).
In addition, Softbank is expected to begin a massive upgrade of their large ADSL subscriber base (more than 5 million subs) to VDSL2 and FTTH. This kind of upgrade necessitates a major infrastructure upgrade, as there is more than a 10-fold increase in the bandwidth needed to support VDSL2 in comparison to ADSL.
Three months ago, Orckit surprised investors by announcing a joint demonstration with T-Systems, at a large cable exposition. Besides the significance of partnering with such a huge integrator, it implies that Orckit is targeting the cable market in addition to the telco market, and certainly makes the addressable market look bigger. Orckit has stated it currently has one large evaluation process in Europe, but remains very confidential about it. The demonstration with T-systems insinuates that the customer is actually a large cable operator, and not a telco.
The “imminent” customer who just recently delayed its decision is an enigma. We know it is a pretty big asian operator most likely outside of Japan. Orckit has offices in both Korea and India, working with local potential customers for over 2 years, but given the monstrous growth rate in the Indian mobile market, an Indian cellular provider from the likes of Bharti and Reliance sounds like a reasonable option. The imminent selection was for a specific layer of the carrier’s network, with a larger RFP for the full network (estimated at a few hundred million over several years) expected next year with a selection in ’08. Indian operators’ announcements about ambitious multi-year network upgrade and expansion plans fits the above description as well. This week, ECI Telecom (ECIL), which is a leading player in the Indian optical market, announced that Bharti had chosen ECI’s next-gen SONET platform for a nationwide optical network expansion. The characteristics of this project, coupled with the timing of the announcement make Bharti the prime suspect.
In summary, Orckit is entering 2008 with low expectations and increasing frustration among investors. Management is still optimistic about being selected for new projects, as customers simply cannot linger for long. Operators are likely to start upgrading their metro transport networks next year, but Orckit’s share in that growing market is still unknown. Personally, I find the nerve-racking anticipation of Orckit’s new win announcements similar to waiting for the last night bus. As time passes by, one part of you keeps thinking that the chances for the bus to arrive are only getting bigger because it has got to arrive some time, while another part is thinking, “you are walking home tonight”. Orckit is a very promising company, indeed, but don’t invest in it unless you are prepared for walking home.