Is the fog lifting over the network equipment sector?

Encouraging forecasts from some of the network equipment industry's biggest vendors are sparking optimism among some observers that the sector's long winter may soon be over.

Last Thursday, Juniper Networks Inc. reported US$201.7 million in net revenue for the third quarter -- half a million-dollar increase over the same period last year -- and is predicting a relatively strong fourth quarter of flat growth. Earlier in the month, Cisco Systems Inc. announced that it would reach its earnings expectations in the first quarter of 2002 and that it sees growth opportunities for its metro optical transport product lines.

Meanwhile, JDS Uniphase Corp. said in late September that it would hit its $325 million target for the first fiscal quarter, and Extreme Networks reported on Wednesday that it had broken even in its first quarter.

Some industry analysts are also seeing light at the end of the tunnel. Gartner in Stamford, Conn., for example, has noted that the global market for WDM (wavelength division multiplexing) gear will grow from $1.1 billion this year to $4.3 billion in 2005.

Similarly, Boston-based The Yankee Group Inc. recently issued a report claiming that "carriers' efforts to meet increased demand are starting to pay off, and they have begun to examine their network architectures."

The report, written by The Yankee Group's analyst Nancy Ruzicka, further argued that new carrier requirements will force providers to upgrade from TDM (time-division multiplexing), ATM, and IP switching technologies to integrated switching platforms. That could mean that ISPs and carriers will soon be forced to spend.

"Too many boxes and too many vulnerable, revenue-reducing connections means that the current approach to expansion -- adding another box -- will be neither sufficient nor economical in the next three to four years," Ruzicka wrote. "Until there is a core device that can switch multiple types of traffic onto an IP over optical core, carriers will not be able to collapse the number of overlays that they are required to operate and maintain."

Some customers, too, have spoken of increased equipment spending. XO Communications Inc., an ISP in Reston, Va., is holding forth with plans to build out its network, and the company is actively purchasing Cisco gear, according to Alan Bavosa, XO's director of product management.

"We're going to be doing joint selling [with Cisco]," Bavosa said. "We're going to be walking into some named accounts with Cisco by our side to give us credibility that we might not otherwise have. Fortune 100 and Fortune 500 accounts are pretty much impenetrable to companies like XO, which are still perceived as startups. Walking in with Cisco helps XO get our foot in the door."

"I think there is a resurgence," offered Ray Bell, CTO of SmartPipes Inc. in Redwood City, Calif. "The last 6 to 12 months were rough, but companies are figuring out how to build their businesses again, and I think people are being a lot more practical about what they're implementing. But IT spending is continuing to grow. What we're not having is the 'field of dreams'-type growth strategy of the dot-com era."

Yet much uncertainty remains, with some observers pointing out that the market's prolonged downward trend coupled with the chilling effect of the Sept. 11 terrorist attacks will be more difficult to surmount than the recent earnings statements would suggest.

Indeed, Tellabs reported a $49.5 million third-quarter loss on Tuesday. Even Ciena, the one-time industry darling, shocked investors in mid August by downgrading its earnings forecast, predicting a 12 percent to 20 percent drop in fourth-quarter revenue.

Much will depend on the future volume of enterprise traffic, according to Alan Tumolillo, COO of Probe Research Inc. in Cedar Knolls, N.J., who pointed out that an uncertain economic picture could scare off new investments.

"What's really going to drive [equipment makers' sales] is what enterprises do, and it's going to be slow right now," Tumolillo said. "They don't know how the rest of the economy is going to play out, so why buy more stuff?"

The Sept. 11 terrorist attacks might also play a role. As a result of the attacks, Merrill Lynch has revised its estimates of next year's IT spending growth to drop by more than half, from 5 percent to 2 percent. Moreover, analysts such as Tumolillo believe that an unstable political climate will cause companies to shift their IT dollars from network equipment to security gear.

Even XO's Bavosa conceded that the tight economy has forced his company to watch its expenditures closely.

"It's no secret that providers like XO are being more scrupulous about where we put our capital dollars," he said. "Every capital dollar is being scrutinized, and we're making sure that we can stretch every bit of revenue out of every dollar that we deploy. The success of our product, and the success of Cisco, depends on how effective an offer we can create [with Cisco], because the more we sell, the more we buy across the board. It's not as if I'm spending $1 million with Cisco and then hoping the customers come. And that's a good thing, because we, as partners, have an equally vested interest in making [our offerings] successful."