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Ciena Raises Its Forecasts

This morning (Thursday) Ciena Corp. (Nasdaq: CIEN) reported Q4 2000 earnings that exceeded analyst expecations, and company officials raised expectations for fiscal 2001.

While the results didn't bowl anybody over, Wall Street was satisfied that the company finished a solid quarter without dropping any unforeseen bombshells on an already shell-shocked Street.

Revenue rose to $287.6 million, up 23 percent sequentially from the third quarter. Ciena said profit was $41.3 million before charges, or 14 cents a share. This is 2 cents above the consensus estimate of analysts surveyed by First Call.

Analysts had some concern about an increase in manufacturing expenses. Joseph R. Chinnici, senior VP of Finance and CFO, explained that the company needed to increase such expenses to meet increased customer demand. These expenses lowered the gross margins to 45 percent, slightly lower than the 46 percent expected by some analysts.

“We expect to see gross margins improve when we ramp up production,” said Chinnici. “New manufacturing partners charge higher rates in the beginning.”

Ciena also took a hit when it came to deployments. Unlike Nortel Networks Corp. (NYSE/Toronto: NT), which said in its latest earnings call that it didn’t have enough people to deploy systems at customers sites, Ciena attributed the problem to higher than expected costs to support installations (see Nortel's Fright Night).

“The service side of the business was also a contributor,” said Chinnici. “We had several large deployments, and nothing always goes according to schedule. Sometimes we have to absorb costs when we send a crew out to a customer and they aren’t ready for us.”

On the bright side, the company's CEO Patrick Nettles raised projections for the coming year and said that revenue should accelerate 75 percent to 85 percent above fiscal 2000. Ciena had been projected to post sales of about $1.4 billion next year. Its new guidance suggests revenue of $1.5 billion to $1.6 billion.

Why increase guidance? Carriers may be tightening their belts on spending, but they are shifting what money they have to next-generation equipment. Ciena officials believe the company is in the position to benefit from such demand.

Long-haul transport products still made up the bulk of revenue this quarter, but COO Gary B. Smith said on the call that demand for the Core Director switching product is growing and could contribute up to 10 percent of revenue as early as Q1 2001.

Ciena added four new customers this quarter, including Dynegy Inc. (NYSE: DYN), increasing the total number of customers contributing to this quarter's revenue to 27. It also increased the number of 10-percent customers (customers who make up more than 10 percent of the company’s revenue) from three to four this quarter.

“Ciena is executing on their Lightera acquisition in spades, and adding marquee customers to the list,” says Scott Clavenna, president of Point East Research and head of research for Light Reading.

But there is still some room for concern. One of those 10-percent customers this quarter was Global TeleSystems Inc. (NYSE: GTS; Frankfurt: GTS), which has been haunted by poor financial performance.

GTS isn’t the only customer that investors are concerned about. The company took a $28 million hit when U.K. service provider Iaxis Ltd. didn’t pay its bill. The company realized about $19 million of that loss this quarter, having already realized the rest in Q3.

“Ciena has added a number of new customers, and I think they are headed in the right direction,” said Paul Silverstein, analyst with Robertson Stephens. “The product set has increased to four from one, and they don’t have any legacy exposure.”

Ciena shares dipped about 2 percent in early trading but started to climb back up the chart by midday, trading around $96, slightly up from Wednesday's close.

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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