Ciena Buys More Than Catena

Ciena Corp. (Nasdaq: CIEN) managed to spring a little surprise on the world today by announcing not one, but two planned acquisitions (see Ciena Buys Catena, Internet Photonics).

Light Reading predicted one of them, the acquisition of broadband access equipment vendor Catena Networks Inc., yesterday (see Ciena to Buy Catena). But the second one -- of Ethernet switch startup Internet Photonics Inc. -- slipped under our radar.

Both deals are all-stock affairs. The Catena one is worth $486.7 million and the Internet Photonics one $150 million, according to Ciena. The acquisitions represent good business for the startups' investors. Catena had raised $192 million from a broad range of investors, including BCE Capital, Berkeley International Capital Corp., Goldman Sachs & Co., and Morgenthaler. Internet Photonics had raised $63 million from a handful of sources, including AT&T Corp. (NYSE: T), ComVentures, Sprout Group, and TeleSoft Partners. Internet Photonics has been working on optical Ethernet developments with AT&T Research Labs.

In the fourth quarter of 2003, Catena recorded revenues of around $25 million, nearly half of its $52 million for the whole of 2003. It had been expecting revenues of about $100 million for 2004, so Ciena is paying nearly five times expected annual revenues. In the same quarter, Internet Photonics recorded revenues of $5 million, putting today's valuation at 7.5 times potential annual revenues.

Ciena says Catena recently became profitable, while Internet Photonics is at an earlier stage of business development. Catena's revenues are currently all from North America, while Internet Photonics has some international revenues. Catena has about 250 on staff and Internet Photonics about 110. Ciena expects to close both deals by the end of its third quarter.

The news sent Ciena's share price down this morning by 10 cents to $6.18 from yesterday's closing price of $6.28, though the price had been lower in pre-market trading.

In a statement, Ciena CEO Gary Smith said Catena is an "acknowledged broadband access leader with meaningful revenue and a significant and complementary customer base" that will accelerate Ciena's "path to profitability."

He added: "We also gain access to a market that is expected to benefit as service providers shift spending to target the access portions of their networks, building out DSL and fiber-based access.”

On the Internet Photonics deal, Smith said the acquisition "expands Ciena’s solution portfolio targeting multiservice operators and traditional carriers with the addition of a flexible platform for carrier-grade Gigabit Ethernet solutions.”

Smith sees this deal as a fast route into the cable operator sector, as the startup has six of the top 10 U.S. cable operators as customers, including Cablevision Systems Corp. (NYSE: CVC) and Adelphia Communications Corp. (Nasdaq: ADLAC). “In the cable market, optical Ethernet is the underlying infrastructure for the new ‘triple-play’ of bundled services, as well as video on demand, voice over IP, and HDTV. It also improves the access speeds of existing services like cable modem Internet access,” Smith said.

"On the surface, these are good moves to address the multiservice access space and the MSO market, both of which are humming these days," says Scott Clavenna, Chief Analyst at Heavy Reading, "but management of acquisitions has never been Ciena's strong suit. I'm afraid this will stretch their abilities to manage disparate companies and cultures even further."

Including today's announcements, Ciena will have acquired four companies in the past 10 months, and 11 in total since late 1997.

Ciena's Smith, though, reckons his company is a well oiled acquisition machine, and that these latest purchases will not stretch the company or senior management too thinly. "We've geared ourselves up for acquisitions. WaveSmith and Akara were integrated quickly. We're 100 percent focused on making these acquisitions work," said the CEO during a conference call. But he conceded: "We don't get it right all the time, that's for sure."

Smith believes this further extension into the access space puts Ciena in a prime position to ride the new capex wave and help carriers address the knock-on effects of growing broadband-related traffic. "We understand what the carriers need to do in the core of their networks to deal with broadband growth. These new acquisitions take us even closer to the edge [than the WaveSmith acquisition], and that's where the money is being spent."

Smith added that Ciena had realized some time ago that its optical business would not grow "at a rate that will get this company where it needs to go," and that product and market diversification was required. "These acquisitions are very consistent with that strategy."

While Internet Photonics will be integrated into Ciena's metro networking business unit, Catena will remain an independent entity within Ciena, forming the company's Broadband Access group. And Catena brings with it an entry into the VOIP world for Ciena, as the startup's CN1000 broadband loop carrier includes a media gateway that allows service providers to offer VOIP over DSL as well as POTS from the same unit.

Ciena also detailed its first-quarter financials and provided an outlook for the second quarter (see Ciena Reports Q1 Results). As previously advised, Ciena disappointed with revenues of $66.4 million and a net loss of $76.7 million, equivalent to 16 cents per share. Smith noted that Ciena had added 14 new customers during the first quarter, including one Tier 1 carrier. The company expects revenues in the second quarter to rise by 20 percent, though this is dependent on the expected closure of some ongoing deals.

CEO Smith added that the company is still very focused on cutting its costs, and that it is aiming to reduce its operating expenses by between 10 per cent and 20 percent by the end of the current financial year, excluding any impact from the new acquisitions [ed. note: layoffs?]. But he added that Ciena wasn't trying to cut its way to profitability, as that would require revenue growth, too.

— Ray Le Maistre, International Editor, Boardwatch