Gary Smith: I’m OK, We’re OK

Says Ciena's acquisitions will pay off in the long run, and that the company had no choice

June 9, 2004

2 Min Read
Gary Smith: I’m OK, We’re OK

Ciena Corp. (Nasdaq: CIEN) CEO Gary Smith continues to see his company as one in transition, making big bets on new markets that he believes will pay off in the long run, according to his comments in an interview with Light Reading.

When telecom’s core transport sector -- Ciena’s largest market -- started to dry up in 2000, the company had only one choice, says Smith: diversify through acquisition. Since then it’s bought six companies for a total of $4.4 billion dollars.

”Doing nothing would have been scarier than what we did,” said Smith, who visited Light Reading’s headquarters in New York yesterday.

Recently, investors have had their doubts (see Ciena Buying Binge Alarms Analysts). They have watched Ciena’s share crumble recently, going from a 52-week high of $8.14 to a recent price of $3.42 (see Ciena Gets a Grilling). The fact that Ciena is still burning cash and that its blockbuster acquisitions have yet to pay off has left investors wondering whether Smith’s grand plan will work.

The largest recent bets? Ciena paid a total of $636 million to acquire Catena and Internet Photonics, which would gain them entrée into, respectively, the broadband access and cable equipment markets (see Ciena Buys More Than Catena ).

It’s a big gamble, and Smith appears to acknowledge that fact. “We’re now involved in the storage space, cable, and broadband access. There are lots of moving parts. Transforming a company such as Ciena is not an easy task."

Smith said that the acquisition binge will pay off in the long run. “You have to segment them into pre-bubble and post-bubble. Some have clearly done better than others."

So far, the biggest dud appears to be Ciena's purchase of Cyras Systems for $2.6 billion during the bubble era. Smith declines to categorize that deal as an outright failure, but Ciena recently announced it would be shutting down its San Jose, Calif., facility; and it's laid off much of the staff from both Cyras and its $900 million acquisition of ONI.

Smith puts Ciena's acquisitions of WaveSmith and Akara into the success category. "It's doing well," he says of Akara. When pressed on whether he would categorize any of the acquisitions as failures, he would not name names.

The biggest blot on Ciena's copybook, according to the most critical shareholders and analysts, is that the company has not had the discipline to stop losing money, while most telecom equipment providers have returned to breakeven in a depressed market.

Smith would not say when Ciena expects to reach cash-flow breakeven, which is consistent with the company’s public statements. He said the company has yet to recognize revenue from its business with Verizon Communications Inc. (NYSE: VZ), which recently inked a contract for the product Ciena acquired from WaveSmith Networks.

Light Reading will publish the interview with Smith in its entirety next week.

— R. Scott Raynovich, US Editor, Light Reading

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