Ciena Corp. (Nasdaq: CIEN) has been running plays right out of Cisco Systems Inc.'s (Nasdaq: CSCO) playbook, but that isn't winning it points on Wall Street.

Like Cisco, Ciena has been buying startups, investing in startups, and trying to get into new areas, rather than hack away at its business while leaving large markets behind.

But Wall Street still casts a skeptical eye, as evident in UBS Investment Research's downgrade of Ciena's shares on Friday.

In his note, analyst Nikos Theodosopoulos points out that Ciena has a long and somewhat muddy road to profitability. "We do not expect the company to become profitable until FY06 at the earliest, even if we consider significant revenue upside from potential contract wins," he writes.

Ciena hasn't said when it will break even, but it has tried to show it's got the right strategy.

In fiscal 2001, nearly 80 percent of Ciena's revenues came from long-haul optical transport.

Since March 2001, the company has spent about $1.6 billion to acquire companies in the storage-over-Sonet, multiservice edge switching, Sonet transport, and metro DWDM markets (see Ciena Completes Akara Buy, Ciena, ONI to Merge for $900M, and Ciena to Acquire WaveSmith).

The result? For fiscal 2003, Ciena's revenues from core products only made up about 41 percent of its total sales. Meanwhile, its metro networking revenues made up 36 percent of sales.

The company's gross margins, however, have been an up-and-down story. Gross margins are a tough thing to predict in telecom equipment anyway. The sale of an initial chassis likely won't command the same margins as the cards and components that plug into the chassis later.

But in Ciena's case, some chunk of the company's anticipated revenues in 2004 will come from its margin-depressed long-haul business. Ciena has said it would take margins in the range of 40 percent to help it get to profitability. For the past three quarters, Ciena's margins have been in the high 20 percent to 30 percent range.

Ciena hasn't been shy about charging toward gear that delivers Ethernet and other data services. "The optical market itself... is basically flat," says Ciena spokesman Denny Bilter. "It's not growing."

Contrast that with Cisco, which intends to make the optical market a billion dollar business at some point (see Cisco's Billion Dollar Plays ).

Some have said Ciena's name is missing from some upcoming metro DWDM RFPs from SBC Communications Inc. (NYSE: SBC) and Verizon Communications Inc. (NYSE: VZ), suggesting the vendor is losing its edge in the optical business at the expense of the new markets it's chasing. Ciena won't discuss specific RFPs, but denies the rumor's premise. "Our foot is not off the accelerator in the metro DWDM space," Bilter says.

So where does this leave Ciena on Wall Street? Perhaps it is seen as one of those companies that will lose a few races, but finish – and perhaps place highly -- in the marathon.

Ciena shares have lost about 11 percent of their value in the past three months. And last week it announced improved revenues, but it still missed analysts' predictions Ciena Dampens Outlook Hopes).

"While we agree with Ciena’s strategy, we don’t necessarily see Ciena’s stock as a compelling investment," writes Sam Wilson, an analyst at JMP Securities, in a research note on Friday.

— Phil Harvey, Senior Editor, Light Reading