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Ciena Buying Binge Alarms Analysts

Light Reading
News Analysis
Light Reading
2/20/2004

The early returns are in, and analysts on Wall Street aren't exactly overjoyed by Ciena Corp.'s (Nasdaq: CIEN) latest acquistion spree.

Earlier in the week Ciena agreed to deals to buy Catena Networks Inc. and Internet Photonics Inc. for a combined price of about $636 million in stock (see Ciena Buys More Than Catena ). Catena makes a broadband digital loop carrier product, and Internet Photonics makes a line of access transport gear -- gear that allows new services to ride on separate wavelengths alongside existing Sonet/SDH services and allows the reuse of lit as well as dark fiber (see Integrating WDM & Sonet/SDH).

This makes a total of of six acquisitions Ciena's made in the last four years. (Here's a bonus trivia question: Can you name them all? Answers below). The bottom line is that the financial world doubts how Ciena will manage the new horses in its stable. Unlike many larger incumbents such as Nortel Networks Corp. (NYSE/Toronto: NT) and Cisco Systems Inc. (Nasdaq: CSCO) -- which have returned to profitability and have stabilized their considerable cash positions -- Ciena is still losing money.

"Why is it that the last two times Ciena has announced a bad quarter they also announce an acquisition?" asks one analyst, whose face was covered in tea leaves. "We believe Ciena is trying to buy revenues, but note that Internet Photonics has never been profitable and we believe Catena only recently showed its first quarter of profitability," writes Alex Henderson, managing director for Smith Barney Equity Research. Henderson, who rates Ciena a Sell, says the company should be first and foremost concerned about reducing its burn rate, as its cash is starting to dwindle. "At current burn rates Ciena has just over three years of cash remaining on its balance sheet," writes Henderson. "We are concerned that the overall market may not strengthen enough and Ciena's competitive position may not be strong enough to significantly stem the burn over the near term."

Other financial analysts share the concern, seeing Ciena take on yet more acquisitions before it has integrated those such as WaveSmith.

"Ciena faces execution risk in integrating acquired businesses and may be spreading itself too thin penetrating new end markets," writes UBS Investment Research analyst Nikos Theodosopoulos, who points out Ciena likely won't be profitable until fiscal year 2006.

Compounding those concerns is the fact that Ciena's extended buying binge hasn't done much to supply growth. The company's difficult 2000 acquisition of Cyras for next-generation Sonet equipment hasn't resulted in any big deals (see Ciena To Buy Cyras for $2.6 Billion, Ciena Grinches Cyras Execs , and Ciena's K2: What Problems?). And despite its acquisition of ONI Systems, Ciena still trails metro DWDM market leaders Nortel and ADVA AG Optical Networking (Frankfurt: ADV). (See Ciena Looking to Merge Away Misery and ONI/Ciena: In Counseling?.) Analysts point out as well that after only three quarters in the Ciena stable, WaveSmith's data-networking sales experienced a quarter-to-quarter decline (see Ciena Nabs WaveSmith and Will WaveSmith Execs Stick Around?). "Adding additional disparate product lines may also add to the overall level of uncertainty for forecasting and managing the business," writes Steve Levy, an analyst for Lehman Brothers. "The margin for error in management's guidance may continue to rise as more new product lines are added."

Oh yes, and don't forget Akara -- Ciena is also trying to penetrate into storage-area networking gear (see Ciena Loses More, Spends More).

After a run up last week, Ciena shares have come back to Earth, giving up 24 percent of their value since the close of trading on Monday. Shares were down $0.15 (2.48%) to $6.02 in afternoon trading on Friday.

— Phil Harvey, News Editor, Light Reading

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JoeBagadonuts
JoeBagadonuts
12/5/2012 | 2:24:18 AM
re: Ciena Buying Binge Alarms Analysts
It seems painfully obvious that he and probably the BOD have no clue on what to do. They have chased revenues, wasted cash, pissed away key account relationships and been slightly manipulative of their dealings with Wall St. Please, anyone, tell us why these acquisitions are going to pan out for them when none of them outside the CoreDirector has? And why haven't the share holders kicked that boob of a CEO to the curb yet?

Cuz in the end, the numbers don't lie!!!!

zillionaire
zillionaire
12/5/2012 | 2:24:16 AM
re: Ciena Buying Binge Alarms Analysts
Joe - they are all to busy voting themselves ANOTHER fat bonus for failure to turn a profit. As long as his wallet gets fatter and fatter, he could care less about performance. If this was done to scale, Ciena would owe GS $75 million in cash if they broke even. He has the greatest job in the world.
jggveth
jggveth
12/5/2012 | 2:24:14 AM
re: Ciena Buying Binge Alarms Analysts
"Why is it that the last two times Ciena has announced a bad quarter they also announce an acquisition?" asks one analyst, whose face was covered in tea leaves
----------------------------------------------

This analyst is missing the point. The previous acquisitions failed - i.e. Cyras, ONI, WaveSmith. Mangement knows this. They had 2 options 1) admit failure and cut costs or 2) Roll the dice again and burn the rest of the cash. They chose option #2 for two reseasns: a) Gary cannot admit failure but at least he cares and b) the rest of the senior management team doesn't give a sh*t b/c they made so much money in the boom times and are semi-retired anyway.

The board HAS to step in and make changes at the top before all value in CIEN is squandered. By they have been asleep at the wheel and memerized by the "up, out and across" crap so don't hold your breath. Anyone who invests in this stock or takes a job at this company is an idiot.
newbee2002
newbee2002
12/5/2012 | 2:24:14 AM
re: Ciena Buying Binge Alarms Analysts
Either giving away their gears, buying revenue, re-pricing stock options, and chopping off employees?
Look what a $1M salary gives you!
JoeBagadonuts
JoeBagadonuts
12/5/2012 | 2:24:14 AM
re: Ciena Buying Binge Alarms Analysts
In the words of Ed McMahon:


You are correct, Ssssssir....<hic>
</hic>
googol_byte
googol_byte
12/5/2012 | 2:24:09 AM
re: Ciena Buying Binge Alarms Analysts
They are the two acquisitions that really started the CIENA machine rolling. Of all of these, Lightera is the only one that produced big results - resulting in CoreDirector.

Check out http://www.ciena.com/corporate... for more details...

newbee2002
newbee2002
12/5/2012 | 2:24:06 AM
re: Ciena Buying Binge Alarms Analysts
"Anyone who invests in this stock or takes a job at this company is an idiot."

I admit that I was one of those idiots. I'd resisted for many years from buying this stock until recently when it became obvious that they won GIGBE and Corvis withdrew from the arm race...

Oh well, I sold yesterday at a (small) loss.
opticalPassion
opticalPassion
12/5/2012 | 2:24:05 AM
re: Ciena Buying Binge Alarms Analysts
Firends from Ciena saying that they have not been working on any real projects for the last 1.5 years.

The work that require only 2 people, now has 6 or more people working on it, and just fixing bugs.

Many called out and are looking for jobs. A sad future for all the Ciena employees.
sir-wish-pro-wide-her
sir-wish-pro-wide-her
12/5/2012 | 2:24:04 AM
re: Ciena Buying Binge Alarms Analysts
First the good news...perhaps the Wall St research analysts should see the glass half fullG«™or as Ciena likes to call it...G«•We see opportunityG«•

With so much different kinds of acquisitions all over the map by Ciena, the Wall Street research analyst can thank Gary for their job securityG«™more complex businesses under one roof needs more complex analysisG«™canG«÷t call the Wall Street analysts covering Ciena, as G«£expensive monkeysG«• because GaryG«÷s acquisition binge in different directions, make the analystsG«÷ job non-trivial. I would understand, if the Wall St analysts covering Ciena went to their respective bosses and asked for a pay-raise. I think possibility of making their case exists...courtesy of Gary.


Now the bad news...this is the G«£We see the glass half emptyG«• scenario...or as Ciena would like to call it G«£We thought we saw opportunity, but it turned out to be a mirageG«•.

There are no other examples to borrow from in the industry peer group in attempting to model Ciena. Emulating CiscoG«÷s investment analysis model to analyze Ciena wonG«÷t work as the only remote possible similarity ends with diversified portfolio. Cisco has much more going for it, including G«£inexpensive CEOG«• among other things. OK how about using ALA or NT or LU to model CIEN? CanG«÷t do that either, for obvious reasons. TLAB is a few tricks pony, so canG«÷t use TLAB to model CIEN. Perhaps ADCT comes close to the similarity, except even ADCT appears to have a somewhat understandable strategy, a long historical track record of surviving, and a decent size installed customer and revenue base.

As an aside, any analyst from Wall Street who covers CIEN, and has anything better than G«£sellG«• rating on CIEN, care to post here their rationale explaining that rating?

Guess who is expensive and smart monkey now?...Gary would ask.
sir-wish-pro-wide-her
sir-wish-pro-wide-her
12/5/2012 | 2:23:55 AM
re: Ciena Buying Binge Alarms Analysts
technonerd states "You know the answer: They're trolling for investment banking business."


Sorry, I dont understand. CIEN mentioned they have $1.5B in cash and cash equivalents. What does trolling for investment banking business mean?
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