If a this past August was true that an ADVA Optical Networking-Coriant merger could not have been worked out, it may have been initially perceived in the industry to have been unfortunate. The two suppliers based in Germany would have complemented each other well with ADVA giving Coriant additional credibility, and the latter potentially providing inroads into the three largest, incumbent ISPs in the US, a goal, which has eluded the former when it came to optical hardware. Together they also would have been in a position to consistently get to that of at least a billion dollars in revenue to not only ensure that necessary developments could be funded, but especially with European customers in the (another reason Nokia Networks would wish to exit is that its wireless archrival, Ericsson, for all intents and purposes, is out of the optics space, along with not dealing with the associated negative consequences), a more impressive alternative to Nokia, could have been available to them (it should be noted that we continue to expect Nokia to experience short-term, optical growth.) Then in light of Infinera’s purchase of Coriant, which we still anticipate as just , there was speculation, also in August, that ADVA would be interested in purchasing ECI Telecom (a company, which has more recently been in of moving toward an IPO). Nonetheless, it has always been our view that ADVA would only purchase or merge with any other transport equipment vendor, especially one providing metro applications, very reluctantly, such as the case with buying MRV. It appeared to us to be a pickup based mainly on an unusual, emergency situation to bolster its technological position, especially on piece-parts. We have also been wondering that if ADVA is going survive in the future, rather than looking to get to the next stage in terms of business size, whether it may need to consider very gradually taking a step or two back from its present ambitions in trying to remain a leading-edge vendor in three extremely competitive business segments. So, it may have some strategic decisions to make, and the answer could be in progressively shifting its focus to a heavier concentration involving its initial roots, the traditional enterprise space, along with supporting the eventual migration of their networks, usually operating no higher than 10G at present, to 40G/100G. Still, the overall optical sector is in unchartered territory given the amount of destruction to margins that has been allowed to occur so far, and all smaller equipment firms have to be wondering if there is anything they can do, which would provide a high level of confidence in a reasonable expectation of good, future results.
As much as ADVA’s CEO, Brian Protiva, complains about the snail’s pace of consolidation in the optics industry, if it happened that the company was inclined to purchase Coriant, or perhaps even ECI, it could easily be anticipated that such combinations would inevitably be caught in the unattractive, proverbial middle. As fibeReality foresees an eventual world duopoly of Huawei and Ciena, such combinations would be unable to compete directly with these leaders on cost, and ADVA would have lost the nimbleness advantage of a smaller, more niche-like player to provide feature/functionality very efficiently. It would have also meant supporting a second major platform with a significant geographic reach, along with inviting questions from buyers, as to which of them would ultimately win out.
At the same time, ADVA earned its reputation for trustworthiness in general in the marketplace. The supplier tends to be one of the most credible suppliers, including in offering for 400G, as well as for of 5G wireless. Without a substantial pullback on its aspirations, ADVA may risk losing this valuable trait.
The company may already have a strategy shift in mind anyway, as it has been recently highlighting “investments in direct sales” (such as on its financial call last month) to go after business accounts of all sizes. It may allow the company to substantially reduce its R&D expenditures, which would result in improved gross margins. In increasing its share of sales in this space, as the firm has characterized it as a “step by step” process (on its Q2 2018 earnings call), it can ultimately wean itself off the market segments constantly demanding plans for the next level of capacity, even as the dominant rate will remain at 100-gig for decades across the telecom/datacom sectors.
It is interesting that on TeraFlex, which will eventually get up to 600G for DCI apps, that “a dramatic cost benefit at 100-gig,” along with this more general statement about its product capabilities: “We've always been good at positioning different 100-gig solutions into different market segments.” ADVA has also implied using the TeraFlex technology in the enterprise space (on the Q2 2018 conference call). In focusing more at the lower rate, and in combining other present offerings, which could potentially demand a premium, including its packet edge and data protection solutions, as well as imaginable, future capabilities, such as capacity usage the C-band and alleviation of stranded capacity in metro mesh configurations, they could enable ADVA to remain indefinitely, as a standalone, optical system house.
Otherwise, regardless of ADVA’s game plan, as it may decide not to radically alter its current course with all of the uncertainty caused by the obliteration of optical ecosystems, it is difficult to see an appealing exit strategy for itself any time soon. Barring a depression in the marketplace, managers at Ciena are likely to view an acquisition of the manufacturer as a threat to their fiefdom. Moreover, if a company with a track record like ADVA cannot figure out a way to hang in the game independently, it cannot be ruled out that the toxicity level in this market environment would have reached a level in which it would be extraordinarily difficult to reverse.
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]