Ciena: Outlook Dim

Ciena's Q1 earnings were low as expected, but its cut in Q2 guidance took many investors by surprise

February 21, 2002

3 Min Read
Ciena: Outlook Dim

Ciena Corp. (Nasdaq: CIEN) stunned Wall Street this morning when it significantly lowered its guidance for the upcoming quarter (see Ciena Closes Q1).

Shares of Ciena fell $0.62 (7.13%) to $8.08 in afternoon trading.

The Street was already braced for bad news. On February 5th, the company preannounced its first-quarter results, lowering revenue expectations to about $160 million from a previously anticipated $225 million (see More Cuts at Ciena).

Ciena reported an operating loss of $56.7 million, or 17 cents a diluted share, for the first quarter. The company had warned losses would be around 19 cents to 22 cents a share.

Investors had expected the bad news for Q1, but it was the news about the future that took them off guard.

"There continues to be a high level of uncertainty surrounding service providers' near-term spending," Ciena CEO Gary Smith said in a statement. "We continue to receive indications of further deployment delays."

On the conference call with analysts, the company lowered guidance for the second quarter to about $100 million without providing further guidance. This new target is down considerably from First Call estimates of $148 million. Ciena says it revised its numbers after hearing from two key customers that they would not be buying as much gear as they had anticipated.

Smith did not mention the customers by name on the call, but many speculate that he was talking about Qwest Communications International Inc. (NYSE: Q) and Sprint Corp. (NYSE: FON).

Both Sprint and Qwest have traditionally accounted for more than 50 percent of Ciena’s revenue. And these carriers have been struggling in recent months. Qwest has issued a series of cuts since November (see Qwest Slowdown Spooks Investors). Last week it announced another $300 million reduction in capital spending. And the carrier was forced to draw on a $4 billion line of bank credit to cover its short-term cash needs after being rebuffed by its customary short-term lenders.

Sprint has also hit rocky times. The carrier announced just last week that it would cut 3,000 jobs and close some of its PCS wireless call centers as it tries to control costs. Some analysts fear that Sprint, with its high level of debt, will also find itself unable to get money from short-term lenders.

How has all this affected Ciena? Rick Schafer, an equities analyst with CIBC World Markets, says it was likely the cuts in spending from Sprint that caused this latest revision in guidance.

“The Qwest cuts were already figured into the numbers when [Ciena] preannounced,” he says. “I don’t know for a fact, but my guess is that Sprint is the other customer that is cutting back.”

This news comes only days after the company announced it would be buying metro DWDM player ONI Systems Inc. (Nasdaq: ONIS) (see Ciena and ONI: Wedding of the Year?). ONI, which had revenues of $42.2 million in Q4 of 2001, is a top player in the metro optical market (see ONI Posts Q4 '01 Results). Since the merger has not been completed, ONI’s numbers are not a part of Ciena’s revenue projections going forward. But analysts like Schafer and Kevin Slocum of Wit Soundview say that ONI can only help the company in the future.

“I still think this was a great purchase from Ciena’s perspective,” says Slocum.

Schafer agrees.“In the long run, Ciena is still the horse to bet on. Their problems are symptomatic of the sector. But with ONI they are now a top player in all three of the major optical markets -- long haul, metro DWDM, and optical switching.”

ONI also was trading down today. Its shares were off 0.40 (6.67%) to 2.23. Other optical companies seemed to suffer collateral damage from Ciena’s bad news: Tellium Inc. (Nasdaq: TELM) was down 0.07 (3.04%) to 2.23, and Corvis Corp. (Nasdaq: CORV) was off 0.03 (2.11%) to 1.39.

— Marguerite Reardon, Senior Editor, Light Reading

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