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Ciena: Outlook Dim

Light Reading
News Analysis
Light Reading
2/21/2002
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Ciena Corp. (Nasdaq: CIEN) stunned Wall Street this morning when it significantly lowered its guidance for the upcoming quarter (see Ciena Closes Q1).

Shares of Ciena fell $0.62 (7.13%) to $8.08 in afternoon trading.

The Street was already braced for bad news. On February 5th, the company preannounced its first-quarter results, lowering revenue expectations to about $160 million from a previously anticipated $225 million (see More Cuts at Ciena).

Ciena reported an operating loss of $56.7 million, or 17 cents a diluted share, for the first quarter. The company had warned losses would be around 19 cents to 22 cents a share.

Investors had expected the bad news for Q1, but it was the news about the future that took them off guard.

"There continues to be a high level of uncertainty surrounding service providers' near-term spending," Ciena CEO Gary Smith said in a statement. "We continue to receive indications of further deployment delays."

On the conference call with analysts, the company lowered guidance for the second quarter to about $100 million without providing further guidance. This new target is down considerably from First Call estimates of $148 million. Ciena says it revised its numbers after hearing from two key customers that they would not be buying as much gear as they had anticipated.

Smith did not mention the customers by name on the call, but many speculate that he was talking about Qwest Communications International Inc. (NYSE: Q) and Sprint Corp. (NYSE: FON).

Both Sprint and Qwest have traditionally accounted for more than 50 percent of Ciena’s revenue. And these carriers have been struggling in recent months. Qwest has issued a series of cuts since November (see Qwest Slowdown Spooks Investors). Last week it announced another $300 million reduction in capital spending. And the carrier was forced to draw on a $4 billion line of bank credit to cover its short-term cash needs after being rebuffed by its customary short-term lenders.

Sprint has also hit rocky times. The carrier announced just last week that it would cut 3,000 jobs and close some of its PCS wireless call centers as it tries to control costs. Some analysts fear that Sprint, with its high level of debt, will also find itself unable to get money from short-term lenders.

How has all this affected Ciena? Rick Schafer, an equities analyst with CIBC World Markets, says it was likely the cuts in spending from Sprint that caused this latest revision in guidance.

“The Qwest cuts were already figured into the numbers when [Ciena] preannounced,” he says. “I don’t know for a fact, but my guess is that Sprint is the other customer that is cutting back.”

This news comes only days after the company announced it would be buying metro DWDM player ONI Systems Inc. (Nasdaq: ONIS) (see Ciena and ONI: Wedding of the Year?). ONI, which had revenues of $42.2 million in Q4 of 2001, is a top player in the metro optical market (see ONI Posts Q4 '01 Results). Since the merger has not been completed, ONI’s numbers are not a part of Ciena’s revenue projections going forward. But analysts like Schafer and Kevin Slocum of Wit Soundview say that ONI can only help the company in the future.

“I still think this was a great purchase from Ciena’s perspective,” says Slocum.

Schafer agrees. “In the long run, Ciena is still the horse to bet on. Their problems are symptomatic of the sector. But with ONI they are now a top player in all three of the major optical markets -- long haul, metro DWDM, and optical switching.”

ONI also was trading down today. Its shares were off 0.40 (6.67%) to 2.23. Other optical companies seemed to suffer collateral damage from Ciena’s bad news: Tellium Inc. (Nasdaq: TELM) was down 0.07 (3.04%) to 2.23, and Corvis Corp. (Nasdaq: CORV) was off 0.03 (2.11%) to 1.39.

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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optigirl
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optigirl,
User Rank: Light Beer
12/4/2012 | 10:54:35 PM
re: Ciena: Outlook Dim
Excuse me but this bozo has been long on Ciena from day one and has continued to push the stock even while it fell all the way down the black hole it's in today. Dave Jackson @ MSDW called it right when he told everyone to "sell Ciena into the strength". Meanwhile, Slocum told all of his clients to ignore the naysayers and keep buying......

Sorry Kevin....you lost your credibility a long time ago. Why you quote this dolt is beyond me, Maggie.

:-{
The_Holy_Grail
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The_Holy_Grail,
User Rank: Light Beer
12/4/2012 | 10:54:34 PM
re: Ciena: Outlook Dim
Has anyone taken a look at what it takes to get the industry out of the downward death spiral the sector is in? Is it fewer players (customers and equipment suppliers)? Is it that the price erosion on bandwidth has exceeeded the revenue growth of customers and there may be no recovery?

I think the techies have focused to much on technology and not enough on the business side. The technology is great, its been fun, but if no one is making money, then it will be shortlived. Its fun building science projects as a one time event, but we must focus on the BOTTOM LINE.

It is my opinion that everyone needs to take a step back and look at reality. How many customers out there are really jumping up and down saying I want dynamic routing on the fly? How many customers out there are saying I want to set up a light path for 10 minutes, tear it down, then re-establish another lightpath for 30 minutes on the fly to another destination?

We need to keep it simple! PERIOD.

I still look at Ciena as the strong leader in DWDM surpassing many of the established payers, and no I don not work for Ciena.
ivehadit
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ivehadit,
User Rank: Light Beer
12/4/2012 | 10:54:34 PM
re: Ciena: Outlook Dim
Ciena expects to book revenues of $100M next quarter, 75% down from 3-6 months back.

In November, 2001, Ciena had just boosted its guidance and said layoffs were due to manufacturing efficiency, not market demand. Could they not have seen that their customer base, mostly CLECs, was fading fast? How could a revenue stream implode so fast without management foreseeing such a possibility.

http://www.lightreading.com/do...

Steven Levy called Ciena's bluff in November. I think he is one of the smartest analysts around.

http://www.lightreading.com/do...

The ONI acquisition was just a cover for the bad news to come. Ciena is on its way to becoming another Sycamore or Corvis.
lightning
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lightning,
User Rank: Light Beer
12/4/2012 | 10:54:33 PM
re: Ciena: Outlook Dim
I think soon Sycamore and Ciena are going to be at the same level..and then it is anybody's game
optigirl
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optigirl,
User Rank: Light Beer
12/4/2012 | 10:54:33 PM
re: Ciena: Outlook Dim
Oh, I get it. Downgrade the stock after it hits the skids but not before having told everyone to buy it when the prices were much higher. I have dealt with this bum before and his Greenwich arrogance is appalling.

Maybe it's "Pick on the Analysts" day on the boards but he really deserves a boot in the rear end for his lack of understanding the optical world. Then again, he tends to believe what RHK tells him so that should tell you something.
The_Holy_Grail
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The_Holy_Grail,
User Rank: Light Beer
12/4/2012 | 10:54:33 PM
re: Ciena: Outlook Dim
"The ONI acquisition was just a cover for the bad news to come. Ciena is on its way to becoming another Sycamore or Corvis"

I disagree. Sycamore is a Ciena wannabe, and I'm still trying to figure Corvis's value proposition. So I don't think your comparison is valid.

I predict Ciena will be one of the survivors. They are just feeling some of the pain that the entire sector is feeling. Its no different than Intel feeling the pain during a semiconductor slump.
oliesgirl
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oliesgirl,
User Rank: Light Beer
12/4/2012 | 10:54:33 PM
re: Ciena: Outlook Dim
Optigirl, good comments, but the latest mailing from Slocum's SoundView downgrades Ciena from a "Strong Buy" to a "Buy".

Perhaps LR is selectively taking quotes?
light_geeking
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light_geeking,
User Rank: Light Beer
12/4/2012 | 10:54:32 PM
re: Ciena: Outlook Dim
The article mentioned:
"GǣI still think this was a great purchase from CienaGs perspective,Gǥ says Slocum.

Schafer agrees. GǣIn the long run, Ciena is still the horse to bet on. Their problems are symptomatic of the sector. But with ONI they are now a top player in all three of the major optical markets -- long haul, metro DWDM, and optical switching.Gǥ"

Does anyone know if Ciena has any traction with ROBCs? My impression is that Ciena has no RBOC customers for their products currently....so that is a first warning sign....Ciena is not at all entrenched in the networks of the most lucrative customers.

Another comment I have is that since Optical Networking systems(including susbystems and components) are at the early phase of their lifecycle, technology obsolescence will be quite high. So while ONI may offer a current generation product, in an environment where telecom carriers are slashing CAPEX spending each day, other well entrenched and financially not-so-distressed equipment vendors are going to fly past the current generation optical systems, by offering next generation optical systems with superior margins (due to maturing optical technologies affording better piece part prices)or atleast for the same price point offering next generation product. And all this at about the same time the CAPEX spending may start picking up again. I think this does not bode as well for Ciena, as some analysts are thinking. Just my two cents.

lg

ex-Lightnet
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ex-Lightnet,
User Rank: Light Beer
12/4/2012 | 10:54:31 PM
re: Ciena: Outlook Dim
Wonder why LR retracted their earlier "steaming pile" opening comment in this article?
optical
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optical,
User Rank: Light Beer
12/4/2012 | 10:54:31 PM
re: Ciena: Outlook Dim
it is only a matter of time before Ciena cracks into mutliple RBOCs. They are in every RBOC lab and they have the right products. it just takes some time for this to all happen, but they are on the right track. The only bad move as I see it that Ciena has made was acquiring Cyras. On paper, the deal made sense but I'd like to know who did the due diligence on the actual K2 product. That product is a dog ! Other than that Ciena is a good bet for the future.
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