Ciena Spending Climbs, Stock Falls

Ciena Corp. (NYSE: CIEN) matched analyst estimates and gave an optimistic growth forecast, but investors apparently were spooked to hear the company's expenses would grow in 2007.

On a day when most stocks were down -- fallout from stock-market declines in Asia -- Ciena was way down, off $2.53 (8%) at $28.94 by early afternoon. The stock had been down 11 percent in the morning.

Operating expenses, not including those related to stock options, should grow moderately during 2007, Ciena officials said on their earnings call with analysts this morning. CFO Joseph Chinnici estimated the opex growth at "several million dollars."

It's a case where Ciena sees "opportunities in both sales and R&D," CEO Gary Smith said on the call. In other words, Ciena is adding sales people and boosting some R&D spending to grab some potential deals it sees hanging out there.

Smith was quick to add that revenues should grow 27 to 30 percent during 2007, so that opex as a percentage of revenues will go down. That wasn't much consolation for analysts, though. During the summer, Ciena, only recently profitable again, had set as its primary goal an increase in operating margins, to 10 percent.

"You've got to do what you think is right for the company in the medium and long term," Smith told Light Reading after Ciena's earnings call. "We'd be remiss if we weren't taking advantage of some of those opportunities."

That spending mostly -- but "not exclusively" -- targets rewards that wouldn't materialize as revenues until 2008 and 2009, Smith said.

Smith wouldn't elaborate on the deals Ciena is chasing, but he implied that some of it involves the big carriers. "A lot of the strength in the business we're seeing is from the Tier 1s, and each of the Tier 1s wants it 'my way,' so to speak," leading to the uptick in R&D spending, he told analysts.

Smith did note, in another context, that Ciena could get some business due to the Alcatel-Lucent (NYSE: ALU) merger. Some carriers used Alcatel and Lucent as their two primary vendors and now need someone else to be a second source.

"There are a number of opportunities we are seeing. I'd kind of liken it to landing slots, in airline parlance."

Asked on the call about further acquisitions, Smith gave the usual answer that Ciena wouldn't turn down any good deals, but he said the company isn't actively looking. "We don't see any obvious holes in our portfolio from a technology point of view."

For its first quarter, which ended Jan. 31, Ciena reported profits of $11.1 million, or 12 cents per share, on revenues of $165.1 million. That compares favorably to a loss of $6.3 million, or 8 cents per share, on revenues of $120.4 million, as reported during the year-ago quarter. (See Ciena Reports Q1.)

Ciena's first-quarter non-GAAP net income of 22 cents per share matched analyst estimates, according to Reuters Research .

Ciena expects second-quarter revenues to be up 5 to 10 percent from the first quarter, a range of $173 million to $182 million. That's higher than the $171.9 million anticipated by analysts. But Ciena also expects its GAAP earnings per share to be 11 to 14 cents for the second quarter, down from the consensus of 21 cents tallied by Reuters.

— Craig Matsumoto, West Coast Editor, Light Reading