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Ciena Boosts Numbers, Cuts Jobs

Boosts guidance, cuts 10% of its workforce, writes off $1.7B; Wall Street cheers

November 12, 2001

4 Min Read
Ciena Boosts Numbers, Cuts Jobs

Ciena Corp. (Nasdaq: CIEN) announced the layoff of 10 percent of its workforce this morning, but officials said revenues for the fourth fiscal quarter could be slightly higher than analysts' consensus estimates (see Ciena Trims Fat).

"Today's news is really about our workforce reduction," CEO Gary Smith told Wall Street analysts on a conference call this morning. "However, we wanted to provide some context." The company revealed details of its fourth fiscal quarter 2001, which closed October 31 and will be reported in full December 13.

Specifically, Ciena plans adjusted net income between $0.04 and $0.06 per share on revenues of $367.8 million for the quarter that ended October 31, 2001. This represents a 19 percent sequential reduction in revenues (see Ciena's Day of Reckoning), but an increase of 27 percent compared to the same time one year ago (see Ciena Reports Q4 Figures).

The guidance is better than what investors had hoped. Until now, analysts' consensus estimates have called for net income of about $0.04 per share on revenues of about $358 million.

Wall Street applauded the news. By early afternoon, Ciena's stock was trading at $19.17, up 1.99 (11.58%).

"This is significant and positive," says Rick Schafer of CIBC World Markets. He says investors have been wondering why the firm hasn't announced a restructuring, given that all major players in the industry have done so.

Despite investors' glee, 380 people, about three quarters of them in Ciena's main manufacturing facility in Baltimore, are out of work. According to Smith, most of these employees were involved in the manufacture of Ciena's CoreStream transport gear. But he was careful to say that a lack of demand wasn't the sole reason for the layoff.

"We're a victim in a sense of our own manufacturing efficiency," Smith said. Ciena's been able to perfect its manufacturing techniques over the past three years to a degree that it doesn't require as much labor to get the same job done. What's more, Smith says, there are more qualified outsourcers dealing with optical gear these days. And he acknowledges that transport demand is down, even though he says the CoreStream, like all of Ciena's products, met revenue expectations this quarter.

Officials said Ciena will take a $5 million to $6 million restructuring charge for the layoffs in the first fiscal quarter 2002. Since the charges are related mostly to manufacturing, they'll affect cost of goods sold and not actual operating expenses, Smith said.

The company also is restructuring some of its physical facilities, taking a $15 million to $16 million charge in the fourth quarter 2001 on "lease terminations and non-cancelable lease costs and the write-down of certain property, equipment and leasehold improvements."

Details of just what's being consolidated are sketchy. Spokespeople say some storage facilities in Maryland will be closed. And Smith said in today's call that in line with reduced manufacturing requirements, Ciena plans to move some testing and support activities associated with manufacturing from Cupertino and Fremont, Calif., back to Maryland. But the California facilities will still be used for other purposes.

Ciena also announced today that it's reassessed the value of its acquisition of Cyras Systems Inc. and plans to take a $1.7 billion charge in the fourth quarter to reduce goodwill related to the purchase.

Back in March 2001, Ciena paid about $1.1 billion for Cyras (see Ciena Completes Cyras Purchase). But the bursting of the optical bubble and the present market downturn apparently have decimated the startup's original valuation.

Still, officials say the products acquired through the merger are doing well. Smith told analysts today that initial revenues from the products based on Cyras's K2 platform are rolling in as expected. And he said the MetroDirector K2 switch has several new customers, although he later acknowledged these are existing Ciena customers and not entirely new takers.

Smith also said plans are still underway to consolidate certain transport ADM functions in the MetroDirector K2, enhancing its cost-savings capabilities for carriers.

While congratulating Ciena on its good numbers, analysts on today's call were frustrated that the company won't provide any guidance for fiscal 2002 for at least another two weeks. Some are concerned about gross margins in the final quarterly report. Others seemed preoccupied with what the news signifies about ongoing demand for Ciena's products. "How can we not look at this as some statement of a change in outlook?" one analyst demanded.

But the company's lips are sealed on further revelations. And Smith seemed confident of ongoing success. "We are not merely surviving," he said, "but also leveraging a strong cash position to continue strategic investments in technology and products and to broaden sales channels."

— Mary Jander, Senior Editor, Light Reading

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