Ciena is sitting on $1.7 billion in cash, so what’s the company planning to do with it?

November 13, 2002

3 Min Read
Will Ciena Put Cash to Use?

NEW YORK -- Things may not be as bad as they seem these days. For example, many companies are sitting on piles of cash. Of course, some investors are eyeing that cash, and wondering whether it will be used properly, rather than steadily incinerated.

Investors here at the UBS Warburg conference drilled Tom Mock, vice president of portfolio management for Ciena Corp. (Nasdaq: CIEN), on that very topic. How does the company plan to use its $1.7 billion worth of cash and investments?

Mock didn't give any clear responses to these questions, but he told investors that the company has a cushion of 28 quarters worth of cash if it can keep its burn rate down to $70 million per quarter.[Ed. note: 'Hey, we're burning it slowly, okay?']Some analysts say this is a rather aggressive target. As of August 22, when the company reported its third-quarter results, its burn rate was well over $100 million (see Ciena Follows the Incumbents). And its revenues were only $50 million for the quarter, according to its 10Q filed with the Securities and Exchange Commission (SEC).

“That sounds a little ambitious to me, given their current burn rate,” says Rick Schafer an analyst with CIBC World Markets. “They have a tremendous balance sheet, but if they’re burning through $100 million plus a quarter, it won’t be that great for long. They’re going to have to make some tough decisions to rationalize the business.”

So what should it do with all that cash? Some investors in the audience today suggested that Ciena use a portion to buy back some of its debt.

Currently Ciena's bonds are yielding about 10 percent. With optical networking business in the gutter, the company might make a better return by paying down its debt rather than investing more in research and development. Mock wouldn’t comment specifically on this topic except to say that the company is investigating all of its options right now.

But the company might also be saving its cash for something else -- some investors were speculating today about possible acquisitions. While Mock said in an interview after the presentation that the company is not close to announcing any acquisitions, he did say that it's looking into areas where acquisitions might make sense.

“In this kind of environment consolidation will happen,” he said. “And like any prudent company we are exploring those options.”

He said during his presentation that carriers are looking to cut back on equipment suppliers, which means that they are looking for vendors that can offer a wide range of products. Currently, Ciena offers only optical switching and transport gear. As a result, experts speculate that Ciena might be interested in buying a next-generation ATM company. It already has investments in two startups: Équipe Communications Corp. and WaveSmith Networks Inc.

“ATM and multiservice switching would certainly make sense for them,” says Schafer. “A lot of those next-generation ATM boxes are getting deployed. That’s where the money seems to be right now.”

Mock agreed that ATM switching is interesting, and he did not discount the idea that Ciena might be investigating this avenue. He also made it clear that Ciena would not be looking at taking out direct competitors like Corvis Corp. (Nasdaq: CORV), Sycamore Networks Inc. (Nasdaq: SCMR), or Tellium Inc. (Nasdaq: TELM).

“We’ll let the market take care of that,” he said.

Ciena closed up $0.38 (10.22%) to $4.10. It reports its fourth quarter and 2002 yearly earnings on December 12, 2002.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.comMovers and shakers from more than 100 companies – including Ciena – will be speaking at Lightspeed Europe. Check it outat Lightspeed Europe 02.

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