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Ciena Improves Outlook

Finally, some positive news from Ciena Corp. (Nasdaq: CIEN). Today the optical equipment maker slightly beat revenue expectations on its fourth-quarter conference call, but it still reported high losses (see Ciena Closes Q4). The company also forecast a 10 percent increase in revenue for the first quarter of fiscal 2003.

While some analysts say they had already expected this revenue improvement, the news was enough to boost the company’s stock up $0.88 (17.16%) to $6.06 in trading this morning.

Revenue for the fourth quarter came in at $61.9 million, up from $50 million in the previous quarter. Analysts had expected revenues of around $60 million for the quarter. The company reported a loss of $754.8 million, or $1.75 per share. These losses included several special charges including $557.3 million for goodwill and $78.7 million for workforce reductions and restructuring.

On the call, Joseph Chinnici, senior vice president of finance and CFO, said that the target for the company to break even is $175 million to $225 million in quarterly revenue based on margins between 40 to 43 percent. Some analysts pointed out that even though the company rasied its outlook, it still has much work to do to return to profitability. Steven D. Levy, an analyst with Lehman Brothers questions the company’s ability to achieve its quarterly breakeven sales within the next two years. Considering that the company is only expecting to make about $66 million next quarter with gross margins still in the teens, this target still seems too high, according to Levy.

“Giving credit to the company, it does appear that they have hit bottom on the revenues and that the decay in its business has ceased,” wrote Levy in a research note this morning. “Some investors might look at this as a positive and it is, but in our opinion it is not enough to justify buying the stock, or even owning it, as the return to profitable operations is so far away.”

Executives on the call said that gross margins improved to 16 percent, about 10 percent better than expected. The company spent about $180 million of its $2.1 billion in cash, including the purchase of ONI convertible bonds, which cost the company $75 million. The company had stated previously it expected to burn about $145 million in cash. Minus the bond purchase, it appears that it actually spent less than anticipated on normal operational expenditures.

As for the future, Ciena execs seemed confident that it would be able to improve revenues by 10 percent. Gary Smith, CEO of the company told analysts on the conference call that he doesn’t expect carrier budgets to improve in 2003, but he believes that a greater proportion of money already allocated will go toward next-generation gear such as Ciena’s.

“The timing of carrier spending is still uncertain,” he said. “But we will still be able to grow our business regardless of whether carriers increase their budgets by expanding our revenue opportunity. There are those that doubt us, but we think we have real opportunity.”

So where does Ciena expect to get this extra 10 percent in revenue? Smith says he is counting heavily on contributions from new customers. The international market will likely play a significant role here. In the fourth quarter, sales to International carriers rose to 55 percent from 42 percent the previous quarter.

He also announced that he would be taking on a more direct role in the sales process. Now all regional sales people will report directly to Smith. This is not a huge leap for him, who prior to taking on the CEO role was head of worldwide sales for Ciena. Light Reading reported in mid-November that Michael McCarthy, Ciena's senior vice president of worldwide sales and support has left the company (see Ciena Streamlines Sales).

Doug Green, principal of the Bradam Group consultancy and former Ciena employee, warns that the first-quarter windfall Ciena is predicting may depend on a budget flush, but that money spent after that may be harder to come by. He says that in the first quarter, carriers often have to make critical expenditures that they have been putting off due to prior-year budget constraints.

“The real question is whether or not Ciena can sustain the growth through the second quarter,” he says. “That’s how we’ll know if they have turned things around.”

Clearly, the optical switching product CoreDirector will play a significant role going forward. Smith said that the product generated more than half of Ciena’s revenue this quarter. Twenty percent of revenues came from the metro products. With this in mind, it’s easy to assume that much of the new business Smith discussed will come from CoreDirector sales overseas.

Carriers such as Deutsche Telekom AG (NYSE: DT) and France Telecom SA (NYSE: FTE) have had RFPs (requests for proposal) on optical switching in the field for several months, but Smith said he expects many of these carriers to be close to awarding contracts.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com
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gigeguy 12/4/2012 | 9:11:40 PM
re: Ciena Improves Outlook Both Equipe and Wavesmith have been blowing their horns regarding their reseller agreements with Ciena. But how much of Ciena's revenue came from reselling either of these companies? I hear a big fat zero.
lightmaster 12/4/2012 | 9:11:37 PM
re: Ciena Improves Outlook According to Gary Smith on the conference call, they have a lot of irons in the fire with Wavesmith and/or Equipe and have very high hopes, but it is "too early to tell" whether it will bring in significant revenue.

I also found it interesting that Smith stated that he sees no need to have any kind of relationship with incumbent data vendors (i.e. Cisco) in order to be succesful. They are pinning their hopes on these two startups.
BobbyMax 12/4/2012 | 9:11:35 PM
re: Ciena Improves Outlook In todays uncertain markets, a single quarter sales figures do not tell much. Ciena has put a lot of money in acquiring Cyras ( Over 4 billion dollars),but the product sales have not caught up. With almost no activities in the core network, the company cannot count on DWDM sales.
VolTrdr 12/4/2012 | 9:11:27 PM
re: Ciena Improves Outlook Is it safe to assume at this point that CIEN has won or is close to winning the lion's share of the optical switching contracts that are currently under consideration? Gary Smith seemed very upbeat on the conference call, even jovial at times (I actually heard him and his mgmt. team laughing and joking with some of the analysts on the call which I have not heard on a telco conf. call in a long, long time). Contrast this to Dan Smith on the last SCMR conf. call who sounded absolutely despondent.

He did emphasize PTTs and CoreDirector as two bright spots. Would CORV be pruning staff in France if they felt the OCS was a contender at France Telecomm?

In addition to DT and FT, I've read that RFPs at BT, Verizon, Sprint, Telecom Italia, and Telefonica are expected to be awarded over the next few months. I think CIEN is a lock at Sprint. The pundits seem to feel that Matt Bross could give CIEN a leg up on the competition at BT as well. Anyone have any insight into the other three (VZ, Tel. It. or Telefonica)?

Could some of the techies give me their opinion on the Cisco switch as well?
optigirl 12/4/2012 | 9:11:26 PM
re: Ciena Improves Outlook No, it is far from safe to assume any wins as of yet and Gary being the sales guy that he is would certainly be upbeat.

Core Director is the company's bright spot. They have a dominant market share and will likely keep it that way. Whoever thought to buy Lightera should thank their lucky stars. Their closest competition right now is Tellabs which is ironic given the almost merger a few years ago. However, they are only selling about $100-$120 million or so of this product a year. The metro numbers are also not very encouraging. If they are doing maybe $40-50 million a year from K2 and ONI products that seems rather insignificant when you factor in what it not only cost the shareholders to buy the companies but also to sustain the current ops. This is a fat company with a lot of extra weight. The new spin coming from the company is that they want to automate the network and cut across network segments is questionable. There are very few companies with the know how and resources to support a full network architecture.



willywilson 12/4/2012 | 9:11:26 PM
re: Ciena Improves Outlook Is it safe to assume at this point that CIEN has won or is close to winning the lion's share of the optical switching contracts that are currently under consideration? Gary Smith seemed very upbeat on the conference call, even jovial at times (I actually heard him and his mgmt. team laughing and joking with some of the analysts on the call which I have not heard on a telco conf. call in a long, long time). Contrast this to Dan Smith on the last SCMR conf. call who sounded absolutely despondent.

He did emphasize PTTs and CoreDirector as two bright spots. Would CORV be pruning staff in France if they felt the OCS was a contender at France Telecomm?

In addition to DT and FT, I've read that RFPs at BT, Verizon, Sprint, Telecom Italia, and Telefonica are expected to be awarded over the next few months. I think CIEN is a lock at Sprint. The pundits seem to feel that Matt Bross could give CIEN a leg up on the competition at BT as well. Anyone have any insight into the other three (VZ, Tel. It. or Telefonica)?

Could some of the techies give me their opinion on the Cisco switch as well?

--------

Oh boy, here we go again. "VolTrdr" doesn't know squat, has the attention span of a gnat and the depth of a puddle in a parking lot, and will undoubtedly hold the stock for 25 minutes, wants to know the news.

Yeah, it's going to the moon! Happy days are here again! LOAD UP THE TRUCK!!!
Elvis Doesnt Live 12/4/2012 | 9:11:24 PM
re: Ciena Improves Outlook optigirl,
FYI, Gary said CoreDirector sales were "slightly less than 40%" for the year, which would put it at ~$145M. Just remember to take note of that when you pull together market share #s for the year.
-Elvis
rzerockzeron 12/4/2012 | 9:11:23 PM
re: Ciena Improves Outlook Did I read the first few posts allright? Is Matt "farm team" Bross at CIEN?

I don't think CIEN is that dumb...

How many 'friends and family' stock he got to join them?

If I was at WCG, it would be a good reason not to buy from any company hiring Matt "get my family and I some stock and I'll aprove your gear" Bross.

RZ, totally in disbelief
Elvis Doesn't Live 12/4/2012 | 9:11:23 PM
re: Ciena Improves Outlook Hey, you mind going out and getting your own name pal? I think that I should have the right to ruin my own good name if I so choose if it is all the same to you.

Signed the Real Elvis
optigirl 12/4/2012 | 9:11:23 PM
re: Ciena Improves Outlook Well, let's do some math, shall we?

My estimates are their likely sales going forward the next 4 quarters. If they are able to do $300 million total for the next four quarters (assumes 20% q over q growth rate) then that gets you $120 million in CD sales based on the 40% share of sales. Seeing as how that growth rate is unlikely to happen then estimating $100 million is a safer bet. While they did over $360 million the previous 4 quarters, the last three quarters averaged $68 million in sales.
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