Ciena Corp. (Nasdaq: CIEN) continues to chip away at its headcount as it works to reduce operating expenses and reach profitability, but more serious cost-cutting efforts are likely on the way.

The company, which will be announcing its third-quarter results for fiscal 2003 next week, has been struggling to increase revenues as carriers continue to put off spending. The company continues to suffer large losses and is coming under increasing pressure to break even, which is likely to result in a larger layoff.

“They need to push revenues up at the same time they cut operating expenses,” says Simon Leopold, an analyst with Merrill Lynch & Co. Inc. “Doing just one of them doesn’t help much.”

The company has already begun reducing costs. On July 29th, it laid off about 50 workers, according to a research note published by Alex Henderson, an analyst with Salomon Smith Barney. It had been estimated to have a headcount of about 2,100 before the layoff, including roughly 95 employees from the WaveSmith Networks acquisition (see Ciena Nabs WaveSmith).

Areas most affected by the downsizing were technical support and sales. The cutback targeted director-level employees, who, on average, made more than $150,000 in total compensation. Henderson estimates the total savings to be about $2.5 million per quarter by early 2004.

Sources close to the company say Ciena may be preparing for even further cuts, possibly reducing the total workforce by as much as 10 percent or roughly 200 positions.

Denny Bilter, a spokesman for Ciena, confirmed that the company has been realigning its operations. But he wouldn’t comment on how many employees have been cut so far, or how many jobs the company expects to eliminate in the future.

“The company is in the process of transforming,” he says. “We’ve made some adjustments in the last few weeks, which have included some layoffs.”

There is no doubt that the company would have to make steep cuts to achieve breakeven at its current revenue run rate. In the quarter ended April 30, 2003, for example, Ciena reported net losses of $75.5 million on only $73.5 million in quarterly revenue. In other words, Ciena lost as much money as it brought in.

Many believe that barring the sudden appearance of any big new deals, the company is going to have to lower its breakeven, which was previously set around $200 million in quarterly revenue, a level of business it hasn't seen in years. Merrill Lynch's Leopold says the company will likely reduce this target to about $150 million per quarter. Even if the breakeven level is lowered, the company still has a long way to go. Analysts are only expecting about $71 million in revenues for the third quarter, according to First Call estimates (see Ciena Sales Up, Outlook Cloudy).

While short-term revenue estimates look bleak, the company has several promising opportunities in the pipeline (see Ciena Rings Up an Upgrade). Contracts with British Telecommunications plc (BT) (NYSE: BTY; London: BTA) are expected to kick in during the fourth quarter of Ciena’s fiscal 2003 (see Ciena's BT Coup: How Big?). Sales to Verizon Communications Inc. (NYSE: VZ) and AT&T Corp. (NYSE: T) for the WaveSmith products are also expected to take off. And the company could get an additional kick from carriers that typically spend more during the last quarter of the calendar year. Henderson expects the company’s fourth-quarter revenues to exceed $75 million.

The company is also believed to be on three of the four shortlists for the federal government’s Global Information Grid Bandwidth Expansion (GIG-BE) project, says Leopold (see DISA Deal D-Day Approaches). He estimates Ciena’s potential opportunity from the GIG-BE contract to be between $100 million and $300 million in fiscal 2004.

Ciena’s stock closed yesterday up $0.05 (0.93%) at $5.40.

— Marguerite Reardon, Senior Editor, Light Reading