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Ciena Loses More, Spends MoreCiena Loses More, Spends More

Ciena plans $45M SAN acquisition... after announcing net losses larger than its quarterly revenues

August 21, 2003

4 Min Read
Ciena Loses More, Spends More

Ciena Corp. (Nasdaq: CIEN) appears to be forging a unique industry strategy on what to do when you have heavy losses: Spend more money!

In reporting a quarter in which its losses exceeded its revenues, the company also announced plans to acquire SAN vendor Akara Corp. for $45 million (see Ciena to Acquire Akara and Ciena Reduces Q3 Loss).

It's an interesting twist in an industry filled with companies retrenching to save money. In fact, Ciena's approach appears to be diametrically opposed to a strategy being pursued by Sycamore Networks Inc. (Nasdaq: SCMR), which has cut things to the bone and is sitting tight on piles of cash (see Sycamore Slouches After Earnings).

In a conference call with Wall Street analysts this morning, Ciena CEO Gary Smith said the deal is part of Ciena's ongoing effort to diversify its product line and customer base and transform itself from a maker of core optical networking gear into a "networking solutions provider."

Meanwhile, Ciena continues to burn cash as its revenues decline. For its third fiscal quarter, ended July 31, the company reported $68.5 million in quarterly revenue, down nearly 7 percent sequentially, and a net loss of $88.9 million, or 20 cents a share. In other words, it lost more money than it brought it in. In the year-ago quarter, Ciena lost nearly $160 million, or 42 cents a share.

This earnings news gives the acquisition naysayers plenty of ammunition. With Ciena losing so much money and so far from breakeven, critics wonder if this is really the time to buy more companies before Ciena's even proven that past acquisitions -- such as Cyras, ONI, and WaveSmith -- have worked out to its advantage.

With its burn rate at such a high level, Ciena probably has no choice but to keep cutting costs. Headcount's at 2,024 after a layoff of "about 90 employees" this past quarter (see Ciena Tightening Its Belt).

This quarter, domestic sales accounted for 60.4 percent of revenues, down from 68.5 percent last quarter. Next quarter should see input from new customers British Telecommunications plc (BT) (NYSE: BTY; London: BTA) and Teléfonos de México, execs said.

39009.gifSo what about Akara? The deal is part of Ciena's push into SAN/enterprise networking, a major driver of metro networking. Akara's been around since late 2000 (see Akara to Challenge Optera?, Akara Completes Successful Trials, and Akara Hacks Headcount). As reported in Light Reading's sister publication, Byte and Switch, it specializes in gear that extends storage-area networking (SAN) over Sonet networks, which lets companies extend metro data backup (see SANs See Sonet and Nortel Pipes SANs Into Sonet).

Akara was one of the first players in this segment, which Ciena estimates to be worth about $300 million to $400 million of the $1 billion-odd overall SAN market. Though Ciena execs acknowledged Akara will add about $1 million to the company's quarterly burn rate, execs said it could contribute to a $3 billion potential market for Ciena in the long term.

Akara faces a growing list of competitors, though, including Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), LightSand Communications Corp., Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT).

The boards of Ciena and Akara have approved the deal, as have Akara stockholders. Ciena stockholder approval isn't needed on this one, execs said.

Akara, which has about 50 employees, will stay in its Ottawa headquarters at its present headcount, Ciena says. It will become Ciena's newly hatched Enterprise Services Group, which will be headed by Akara CEO Edward Ogonek. Initially, Ciena will probably report Akara sales with metro transport revenues.

Ciena says it will keep acquiring, too. Besides Akara, excecutives say it plans $15 million in additional investment in private companies this quarter. While speculation's rampant about what may be on Ciena's wish list (see Is Ciena Eyeing Luminous & Laurel?), no details were offered. One thing, though: Execs make it clear Ciena might invest where partners are needed to meet some of the RFPs (requests for proposal) that have cropped up this past quarter, for which the company sees good opportunities (see Analysts Narrow RFP Odds).

Ciena claims seven new customers during the quarter, for a total of 72, in part thanks to the WaveSmith acquisition, which brought in SBC Communications Inc. (NYSE: SBC). Two customers, unnamed, accounted for 23 percent of revenues this quarter, but that figure was down from 43 percent last quarter.

Smith said revenue next quarter "is likely to be between 5 percent up or down from our fiscal third quarter revenue, depending on the timing of significant orders."

Ciena shares were trading at $5.77, down $0.05 (0.91%), after this morning's report.

— Mary Jander, Senior Editor, Light Reading

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