Will Ciena Change at the Top?
Today, after announcing another in a series of disappointing quarterly results, Ciena's shares fluctuated within pennies of $2 (see Ciena Dips as Losses Widen). That it didn't drop more is minor salve on the singed skin of Ciena investors, who have seen the stock lose three quarters of its value from its 52-week high of $8.14.
Now the big question is: How long will Ciena's board continue to support CEO Gary Smith? (See Gary Smith, CEO, Ciena.) Smith stood his ground during Ciena's stock slide, maintaining that the company is poised to turn around in the long run.
In recent weeks, sources in Wall Street's investment community say there's a movement building to try to remove Smith, but Ciena's board, stacked with long-time supports of chairman Pat Nettles, appears to be a large immovable object. A Ciena press release issued today declared support for the company's strategy.
"Ciena is pursuing a complex, long-term strategy in an unpredictable and dynamic market," says H. Berry Cash, a Ciena director, in the statement. "The company has substantially expanded its addressable markets while simultaneously implementing significant cost reductions and operating changes. The board is confident these actions represent the best longterm interests of the company's shareholders and will lead to a return to profitability and improved shareholder value."
Analysts say Ciena's closed corporate culture has protected Smith and other top management figures. Firing management would be seen as an admission of failure in its broad M&A strategy, which has yielded six acquisitions in four years (see Ciena Buying Binge Alarms Analysts). Several sources close to the company also point out that Smith shouldn't shoulder all the blame -- as Ciena's strategy has been directed by others at the top, including chairman Pat Nettles and chief strategy officer Steve Chaddick.
Some observers say a shakeout may now be needed, as the company has shown an inability to make adjustments.
"The real challenge is, can they bring in new blood and give serious thought to the strategy," says Doug Green, principal of the Bradam Group and a telecom equipment veteran of Ciena, Chromatis Networks (acquired by Lucent Technologies Inc.), and Ocular Networks (acquired by Tellabs Inc.).
"The company's very relationship oriented, and Pat Nettles has chosen the board members," says Green. "It's not like they set out to be an inbred company, but they haven't done much to bring many outsiders in."
Despite the board's statement issued today, Wall Street sources say Ciena's board is feeling the heat of plummeting stock price and nearly an entire year of failing to meet financial guidance (see Ciena Seeks R-E-S-P-E-C-T). Question numero uno: Can Gary Smith, Ciena's CEO, weather the storm?
"I'd say he's got one more quarter to go," says one investment source who holds no Ciena shares. "One more quarter of disappointment and the sh*t really starts to hit the fan."
Which brings up another question: How low can Ciena's stock go? In the last two weeks, following Ciena's warning about today's results, the stock gave the impression it could flirt with penny status, trading as low as $1.67, a 52-week low (see Ciena's Ugly Day and Ciena Warns of Revenue Miss). Marcus Kupferschmidt, an analyst with Lehman Brothers, says he remains "cautious" on Ciena shares, and he says that one key support point -- the cash available on Ciena's balance sheet -- remains substantially below where the stock price sits today.
Kupferschmidt calculates Ciena's net cash position at about $0.70 per share. He gets that number using a discounted cash-flow model, by which he takes Ciena's current pile of cash and then subtracts $690 million in convertible debt and the cash the company is likely to burn through the rest of 2004. Kupferschmidt says the stock could be supported by this net cash position -- but that's only if Ciena can show it can stop losing money.
The bottom line: Time is running out for Ciena's management, and they've got to turn things around in the next couple of quarters. Judging from this morning's conference call, Ciena's newest acquisition, Catena, may carry much of the burden of that short-term success (see Ciena Buys More Than Catena ).
"A lot of the issues are focused on Catena," says Stan Hubbard, an analyst with Heavy Reading, Light Reading's paid research services, and another former Ciena employee. "All eyes are on the Catena unit now. It is critical for Ciena's success in the next few quarters because the market is so dynamic and no competitor is going to politely stand by and wait for Ciena to expand beyond its beachhead in the RBOC accounts."
As for big changes at the top? Hubbard says that if things continue the way they've been going, he'll be surprised if nothing happens. He also says the company's move to issue a press release which included a show of board support was unusual, and may reflect a defensive move against mounting criticism.
Ciena did make one adjustment to its board structure today, announcing that it has added a new outside director, Michael J. Rowny, chairman of Rowny Capital and former president and CEO of MCI's International Ventures, Alliances and Correspondent group. Rowny will become the Ciena board's tenth member and eighth independent director. — R. Scott Raynovich, U.S. Editor, Light Reading