ADVA: Next Optics Dynamo in NA

The combination of the apparent penetration of ADVA Optical Networking into the incumbent ISP transport gear marketplace, along with the anticipation of the number of sizable players continuing to dwindle, appears to make the company well-positioned to become a principal optical system vendor in North America. The supplier’s confidence in reaching the next level on the continent is evidently quite high, as fibeReality hears that it is currently constructing a $3 million lab in Ottawa. (Part of this effort is that ADVA will increasingly become a prominent leader of the 5G infrastructure play, including beyond just optics considerations.) So, the idea that it is in “the middle of a nice pipeline build in North America” as expressed on its Q3 2018 earnings call, could turn out to be an extraordinary understatement. Obviously, like fibeReality, ADVA is betting that both Nokia Networks and Infinera will not remain in the space in the longer term. We also fully expect that ADVA would need to ultimately consider shifting to a greater amount of vertical integration, particularly in-house development of DSPs. While fibeReality suspects that Inphi would make a better acquisition candidate than Acacia Communications, in terms of a culture fit, the latter is a “partner.”

Assuming that our intelligence gathering is correct, and that a three-way deal can be reached between CenturyLink, T-Mobile, and Sprint, the prospects of supporting a much greater 5G wireless effort could certainly be very beneficial to ADVA, as well as to Calix, our last prognostication on the next “powerhouse” (the initial validation with valuation has started to happen). Like the latter in the past, the former will benefit in getting its feet wet gradually with an “RBOC” type of a network, as CenturyLink only has a handful of NFL cities within its traditional territory.

Clearly, ADVA, as largely an optics firm, could become important to all three of the major US ISPs in trying to keep Ciena honest. Although Fujitsu Network Communications has come back before in the States, right now, we are only aware of one new opportunity in selling passive optical devices to AT&T for 5G applications, which would be rather underwhelming, compared with its previous, conspicuous position in the metro space. Also, Verizon may be unlikely to forgive Fujitsu anytime soon in moving in a disaggregation direction.

Greater penetration into the tier 1 market will be a relief to ADVA, after being unable to sufficiently avoid the especially cutthroat nature of the hyperscale data center operator business. On a positive note for the manufacturer, Cisco’s leadership may decide against giving its optical division a pass with the inevitable margin decline on the optical side, resulting from its purchase of Luxtera. It would hardly be inconceivable to see fewer resources being allocated to the optical division. (While Juniper Networks is in the mix as well, we expect to see more of a router/transport combination from that corporation.)

Frankly, it is also not out of the question that the duopoly at CenturyLink for metro gear, could eventually become the situation at the other two tier 1 carriers as well. However, our supposition is that ADVA’s own preoccupation with a disaggregated approach has stopped short of the point that it would be a showstopper at Verizon. Moreover, we are also presuming that AT&T will view the supplier in a brand, new light, since its inadequate execution, as part of a Fujitsu OEM of ADVA.

Assuming both Infinera and Nokia eventually leaving the picture, there would not be an obvious, serious competitor to Ciena for long-haul applications. ADVA has focused at best, on regional capabilities, instead of the vast distance requirements found in the States. To be sure, ADVA is actively involved with trials over lengthier spans, including for submarine deployments.

As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.

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[written by Mark Lutkowitz]