Balancing act

With the networking market still plagued by financial troubles, vendors are targeting growth markets, such as the Middle East, to help them get the balance sheet back in order

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By  Zoe Moleshead Published  February 25, 2003

Financial doldrums|~||~||~|The networking and telecoms market has been in the economic doldrums for over two years now. Each fiscal quarter brings in a new set of ‘red’ figures from the majority of the market players, while CEOs and CFOs pep up these returns with talk of higher than expected results and continuing progress in redressing the balance sheet.

However, vendors are finally beginning to express some degree of optimism for 2003, believing that the financial troubles may be bottoming out. A focus on the continued growth in the enterprise sector and emerging markets such as the Middle East is also fuelling this positive outlook.

“It looks like we have reached the bottom. The issue is how quickly it will be before it [the market] starts to rise again,” comments John Marshall, sales director, Marconi Middle East.

With much of the financial doom and gloom linked to the telecoms market and the cuts that operators and service providers have been forced to make in their network spending, the fate of many vendors is tied directly to this sector. Consequently, vendors are forced to play a waiting game, hoping that this quarter will be the one in which operators begin investing in their infrastructure again.

“There was a worldwide downturn a few years ago. At the same time you had the effect of the European 3G licenses auction where about US$100 billion was spent. Then there was the bursting of the dot-com bubble and these all happened around the same time and left service providers with huge debts,” explains Marshall.

“The service providers have to get their balance sheets back in order and to do that they cut costs and their expenditure and that is what effects the likes of us [Marconi] and other equipment suppliers,” he adds.

While Marconi has been sharing its economics misfortunes with the likes of Lucent Technologies, Nortel Networks and Alcatel — those vendors that predominantly operate in the service provider segment — other networking players, such as Foundry Networks and Extreme Networks have weathered the storm with fewer financial problems.

Both vendors attribute this to maintaining a core focus on a few specific segments of the market and not expanding rashly into developing products for other areas of the network infrastructure. “We have maintained a steady focus — offering a simplified infrastructure built on Ethernet technology. Many of our competitors have jumped from market to market with a variety of technologies,” says Emad Makiya, general manager, Extreme Networks, MENA region.

“We didn’t spread ourselves out into too many different areas, buy out lots of companies or move into lots of other technologies. Since we were innovating and leading in a few areas we were able to focus on those areas and not get our attention diverted,” adds Farook Majeed, regional director, Foundry Networks.

Foundry also cites its transition from the service provider market to the enterprise sector as critical in avoiding the worst of the financial troubles.

“After the slow down in the service provider market we shifted our model into the enterprise. Today 80% of our business comes from the enterprise, which keeps our cash flows on the positive side,” comments Majeed.

Other vendors have also adopted a back to basics approach, shedding non-core business units and increasingly turning their attention to the enterprise sector. Consequently, the market conditions have led to an increasingly bullish attitude among network players. However, with vendors holding only modest growth expectations, they are looking to grab market share from rivals to boost their bottom line.

“Fundamentally the business model that we have put together allows us to grow. [But] we are growing in many of these markets primarily at the expense of our competitors,” confirms Buddie Ceronie, regional director, multi-country region, business networks company, 3Com.

||**||Bright spots|~||~||~|The Middle East market has, however, proved a bright spot for many vendors, with the continuing construction and infrastructure build out fuelling growth opportunities. The strong government ties of regional telcos and differing economic factors are also playing a part in maintaining spending within the Middle East’s telecoms sector.

“In general, the telecoms market is pretty flat, but the Middle East is slightly different,” says Marconi’s Marshall. “In the Middle East, the [telco] spending is more linked to the price of oil, the amount of money in the coffers and, as many of the operators are still government owned, they don’t have quite the same constraints [as other regions,]” he explains.

Although the Middle East is providing greater growth opportunities for vendors operating in both the enterprise and service provider segments, the market is, however, proving highly competitive with customers displaying a more cautious attitude towards their network spending.

“If North America and other markets are declining then you tend to find some degree of focus in markets that are spending, so the Middle East is very competitive. We find here [in the Middle East] that there is spending going on but it is still cautious, decisions are being thought through carefully,” states Marshall.

While the increasingly controlled approach to spending can be linked to the higher levels of IT knowledge and awareness that are now beginning to proliferate the regional market, vendors are also finding that they have to adapt their market strategies to capitalise on the potential enterprise opportunities available.

For vendors such as 3Com that have focused predominantly on the small-to-medium business (SMB) segment and, consequently, provide solutions and technologies geared to this market, they have had to adjust their game plan to challenge for the bigger regional enterprise projects.

“There is more project oriented work here [in the Middle East] than the usual run rate of small business. [We are targeting] larger, enterprise projects, but overall we would like to work on both fronts and increase both parts of the business,” says Ceronie.
Although most of the vendors concede that the Middle East market is not the largest, either in terms of size or revenues, the region is described by most as a strategic or growth market. And with the Middle East market continuing to yield opportunities in the networking sector, many of the vendors including 3Com and Foundry are looking to expand their resources and operations in the region.

“Basically we want to add to our resources in the future with more senior direct touch people for end user contacts, market knowledge, knowledge of our competitors and the project business,” says Wael Fakharany, regional manager, 3Com Middle East.

“Our next challenge is to set up a dedicated sales team in Saudi, which will focus on the opportunities there,” he continues.

Globally, vendors remain modestly optimistic about a return to spending within the service provider and enterprise segments. However, they do suggest that the trend towards converging voice, data and video in a single network will play a key factor in encouraging enterprises to invest in their infrastructures again.

“It is too difficult to predict market changes. However, companies are increasingly deploying more complex applications on their networks to reap the benefits of improved communications and real time applications. Applications such as video and voice are being added to networks and companies require an infrastructure to support these applications,” explains Extreme’s Makiya.

Analysts also support this view, and anticipate improvements in the networking space over the coming years, with much of the growth fuelled by the uptake of wireless and metropolitan area networks (MANs).

“The metro Ethernet equipment market is still an enormous opportunity for vendors,” says Sterling Perrin, senior research analyst with IDC’s optical networks programme.

“Revenue and growth will be substantial and should attract the attention of any large telecommunications and networking suppliers looking for growth opportunities over the next five years,” he adds.

Similarly, vendors believe that the continuing increase in data traffic will ultimately force telcos and service providers to splash their cash again and build out their networks to cope with traffic levels.

“Data traffic is growing at 50% a year and if the traffic is growing they [service providers] are going to have to begin spending again. They can reduce their expenditure for a period because they have enough cabling in the ground and enough network capacity, but at some point they have to start spending,” concludes Marshall.

||**||Vendor breakdown|~||~||~|The latest financial figures from the networking players reveal mixed fortunes, but highlight that economic troubles are by no means at an end. NME offers a brief rundown on the latest reported figures from the network vendors (all figures are US$):

3Com reported revenues of $303 million for the second quarter of 2003, with operating costs up $46 million sequentially to $217 million. The vendor did, however, manage to reduce its net loss quarter over quarter from $98 million to $69 million.

Alcatel boosted its fourth quarter sales sequentially by 28.5%, topping $4.843 billion in the fourth quarter of 2002, compared to $3.769 billion in Q302. However, the vendor reported a net loss of $1.202 billion.

Avaya posted a slight decline in revenues for the first fiscal quarter 2003. The vendor’s revenues were down 7.4% from $1.152 billion in Q402 to $1.067 billion in Q103. The vendor reduced its net loss to $33.4 million in Q103, from $72.8 million in Q402.

Cisco Systems reported net sales of $4.7 billion for Q2 2003, representing a slight decrease of 2.1% from the $4.8 billion attained in Q103 and the same quarter of 2002. Net income, however, was up to $990 million from the $618 million reported in Q103.

Extreme Networks posted Q2 2003 net revenues of $90.2 million, down from the $100.6 million the company pulled in during the first quarter of the fiscal year. The vendor also reported an increase in its net loss quarter over quarter from $4.7 million to $19.7 million.

Foundry Networks posted its 16th sequential quarterly improvement in its net revenues, which topped $86.7 million in Q402, an increase from the $76.6 million earned in Q302. The vendor also reported net income of $10.5 million, compared to a net loss of $10.7 million in Q401.

Lucent Technologies’ Q1 2003 figures fell in line with its expectations. Revenues of $2.08 billion were reported, down 9% from the $2.28 billion of Q402. However, the vendor’s net loss showed vast improvements weighing in at $264 million, compared to $2.81 billion in Q402.

Marconi reported a 5% sequential decline in core sales, which topped $730.1 million in its last fiscal quarter. The vendor also reduced its core operating cost annual run rate to $880.6 million, with plans to drive this down to $720.5 million by the end of the next financial year.

Nortel Networks posted a sequential increase of 7% in Q402 revenues, which topped $2.52 billion, but this was down from the $3.46 billion Q401. The vendor, however, slashed its net loss from $1.83 billion in Q401 to just $248 million in Q402.||**||

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