Cable Tech

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

zillionaire 12/5/2012 | 1:37:19 AM
re: Gary Smith: I’m OK, We’re OK EOM
JoeBagadonuts 12/5/2012 | 1:37:19 AM
re: Gary Smith: I’m OK, We’re OK Why bother? All we would be doing is rehashing the same ol', same ol'.

My question is why are we reading this story but not hearing anything about the Bush administration's refusal to do anything about appealing the court decision to kcik out the FCC ruling on unbundling. Not that I am saying that they should have but it's far more relevant than Mr. Smith and co.

lastmile 12/5/2012 | 1:37:15 AM
re: Gary Smith: I’m OK, We’re OK JoeBagadonuts:
There has been no response to your post. Instead some readers are wasting their time grading your reply.
What has happened today is something the staff of LR should have taken seriously and given us all an insight as to what the significance of the Bush administration decision to try to end the legal infighting really means to the entire industry.
It is a shame that an important development like this is being sidelined for something less important like bashing individuals.
JoeBagadonuts 12/5/2012 | 1:37:12 AM
re: Gary Smith: I’m OK, We’re OK The problem with the industry is that there is so little to talk about that matters any longer. Ciena is basically trading off of past glory and the fact that they garner any attention at all is a testiment to that thought. Can one argue with their strategy? Maybe but then again, LH died a long time ago so their only choice was to sit and wait for the market to recover, acquire companies who had some hope of selling something and/or go after completely new markets. Their financial management has been horrendous and the executive level has been looking at the world with their collective heads up their cans. If they had executed better would they be in that much better shape? Maybe on their balance sheet (which counts for something) but I suspect that they would still be in the same boat as everyone else.

The court decision is huge and deserves some well considered analysis. Yes, the liberals will cry about Bush bending over for big business, although I can't see how unions can complain here, but when you have an industry that depends on competitive subsidy in order to remain a certain size then what you have is a failed model.
Scott Raynovich 12/5/2012 | 1:37:02 AM
re: Gary Smith: I’m OK, We’re OK We'll be covering this today in an analytical way rather than the "Bush Admin did this" approach taken by 146 other publications.
materialgirl 12/5/2012 | 1:36:58 AM
re: Gary Smith: I’m OK, We’re OK CIEN matters. It points out a weakness in our system. We allocate capital the best in the world, the best we can, but we still get garbage like CIEN.

These guys raised $1B of someone's retirement money on promises of growth. That did not happen. What they could/should have done then is RETURN THE MONEY.

But no, it is more fun to spend it and run around acting like a big executive. With this big cash balance, what do they care? The least they could have done is cut their expenses to the bone, like SCMR did.

Any way you look at it, CIEN management is of poor quality. They have no concept of owner ROI. They should all go. Meanwhile, they burn through $1B of someone's savings acting like bigshots.

Let us not forget, these baby boomers have to retire some day. Social Security is a joke. They have no savings. We will have a generation of old folks eating Alpo, in part due to wasteful behavior like this.

Capital markets matter. They allocate our collective savings to more productive ends so we can live our lives well and hand over something decent to our kids. Companies like CIEN show us what not to do. It is up to us to learn from our own history.
SIVROCX 12/5/2012 | 1:36:27 AM
re: Gary Smith: I’m OK, We’re OK Materialgirl, CIENA appears to be very much like Corvis which had the largest IPO on record if my memory serves me correctly. Lots of grandma's money has been wasted with little or no accountablility. Maybe the stars will align and they (the management of both companies)will in the end look like geniuses, I hope so. But then again I forgot to take my medication this morning and am not thinking straight. +£
MrLight 12/5/2012 | 1:35:49 AM
re: Gary Smith: I’m OK, We’re OK Ciena had a chose, see my post of Nov.17.2002 http://www.lightreading.com/bo... .

Ciena needed, and still needs, to develop a GLOBAL product strategy that will get them where they want to be.

The act of buying Akara, Catena and Intelligent Photonics without having such a strategy is very risky, especially since these companies had only one main product each. Products that targeted very different customers - enterprise, carrier and MSO, and were totally USA market focused.

Yes, such buys expand your customer base, and maybe your revenue per employee, but it is a short term thing without expending some money to get some synergy between the companies, since the extra SG&A to serve such different markets will eat at your margins. Furthermore, three acquisitions will need some cash to fully productize their products since each one of them made architectural comprises to get to the market fast at the expense of the evolability of the product.

I could go on, but hey why should I, I don't work there or have Ciena shares, they do.

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