Ciena Gets a Grilling

Stock plunges as CEO is forced on the defensive over weak results and impact of job cuts on customers

May 20, 2004

3 Min Read
Ciena Gets a Grilling

Ciena Corp. (Nasdaq: CIEN) CEO Gary Smith was forced onto the defensive during a conference call today as analysts pressured him over the firm's cost-cutting policy and its acquisition strategy.

The grilling came as Ciena announced second-quarter revenues of $74.7 million, short of analysts' expectations, and a net loss of $76.2 million (see Ciena Closes Q2). That sent the stock into a spiral, and by early afternoon Ciena's share price was down by 49 cents, nearly 13 percent, at $3.39.

That values the company at $1.6 billion. If the stock falls any farther, the vendor won't be worth much more than its total assets, which currently stand at $1.46 billion.

That sort of reaction is clearly irking Smith. He told the conference call that Wall Street underestimates the commitment of Ciena's management team to fix the company's business model.

That involves increasing revenues and cutting costs, both of which are happening, says the CEO. The company is forecasting third-quarter revenues up to 30 percent higher (about $97 million), while ongoing cost-cutting programs will see the company reduce its quarterly opex costs to between $65 million and $70 million by the first quarter of the 2005 financial year.

Operating costs in the second quarter were $83.3 million, but will jump to between $90 million and $94 million in the current quarter due to the cost of Ciena's recent acquisitions (see Ciena Completes Acquisitions).

A major part of the cost-cutting operation involves the culling of 425 jobs in San Jose, Calif., a "difficult but necessary" process that has now begun (see Ciena Cuts 1/4 of Staff). That cut will account for a quarter of the 1,702 staff Ciena had at the end of the second quarter (which didn't include the 380 coming with Catena and Internet Photonics), prompting one analyst to question whether Ciena will have enough staff to deal properly with its big-name carrier customers, such as BT Group plc (NYSE: BTY; London: BTA), MCI (Nasdaq: WCOEQ, MCWEQ), and Verizon Communications Inc. (NYSE: VZ).

Smith says the company can cope because it invested heavily during the downturn, particularly in its core optical products. "It's timely to decrease investment there and rebalance towards our access platforms. We're not jeopardizing our competitive position," and "we're making every effort to make sure we don't impact our customers."

But the job losses in San Jose won't be the end of the staff cuts. A Ciena spokesman says there will "probably be additional" job losses, but that the 425 in San Jose is "the biggest push." He denies that another 300 positions are about to be cut, as suggested yesterday by "We don't have plans in place that involve that sort of number," he says.

It's not only the headcount situation that's worrying analysts. One questioned whether Ciena's acquisitions were paying off, saying that the firm's "track record is not showing too well." (See Ciena to Acquire Akara and Ciena Nabs WaveSmith.)

Smith's response? The WaveSmith and Akara markets are still at the early stages of their growth, and it's going to take a while for revenues from those acquisitions to really kick in, says the CEO, noting that, while Verizon Communications Inc. (NYSE: VZ) has deployed Wavesmith technology, no revenues have yet been recognized from that deal (see Ciena Seals Verizon Deal).

— Ray Le Maistre, International Editor, Boardwatch

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