Ciena Improves Outlook
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