Ciena Takes Another Dip

Ciena Corp. (Nasdaq: CIEN) led optical networking stocks lower today following a note from Morgan Stanley Dean Witter & Co. analysts that lowered revenue and earnings forecasts on the company for fiscal 2002.

In trading today, Ciena shares dropped 1.49 (11.48%) to 11.49.

The Light Reading Index, an index of 38 leading optical and networking stocks, dropped 8.22 (5.12%) to 152.48, hitting a new all-time low.

This morning, Morgan Stanley analysts Alkesh Shah, David Jackson, and Arif Mawjia issued a note to investors that lowered Ciena's fiscal 2002 revenue EPS estimates to $1.62 billion and $0.35, respectively, from $1.82 billion and $0.49.

In the note, analysts assess Ciena’s fair market value at $14, down from its previous fair market value of $16. Analysts say trading on the stock could drop as low as between $4 and $6 a share, with any price below $10 considered a buying opportunity.

Gross margins are also expected to fall and expectations have been lowered to 43.7 percent, down from 44.6 percent.

Ciena’s stock had already been on a downward path resulting from concerns about the optical industry at large (see Market Reopens, LR Index Hits New Low). On August 16, 2001 the company reported disappointing news in its Q3 results, lowering forecasts. This sent the stock down over 30 percent after the news broke (see Ciena's Day of Reckoning). Since then, other firms have issued notes and downgrades on the company’s stock, including Salomon Smith Barney and Lehman Brothers.

Analysts from Morgan Stanley say the new estimates take into account information that has come to light in the past two to three weeks. Last week, Qwest Communications International Corp. (NYSE: Q), which made up approximately 30 percent to 40 percent of Ciena’s second quarter revenues this year, announced that it would be cutting capital spending between $2.3 billion and $2.5 billion in the 2001 and 2002 budgets. Changes in spending targets represent a 35 percent year over year decline for 2002. According to the report, Ciena is one of Qwest’s key suppliers of DWDM equipment and optical switches.

Qwest’s announcement followed on the heels of other bad news from an important Ciena customer. Last month, WorldCom Inc. (Nasdaq: WCOM) announced that its capital spending budget for 2002 would be $5.5 billion, down from earlier estimates of about $7 billion. Ciena is also one of Worldcom’s biggest suppliers of metro area DWDM gear. Analysts at Morgan Stanley believe that these sales to Worldcom make up about 10 percent of the total metro DWDM sales in the market.

Morgan Stanley analysts also believe that the recent terrorist attacks in the U.S. will have a negative impact on the global economic landscape, which will trickle down into telecom spending. The firm’s economist Stephen Roach has said that reverberations of these events could push the world’s economies into a global recession.

“Decreasing consumer confidence could lead to decreased end-user demand for telecom services, delaying any further potential increase in capital spending by enterprises or service providers,” the analysts predict.

While Morgan Stanley feels that its revised estimates are conservative, analysts warn that there are lingering concerns that could still impact the stock.

For one, they see a potential weakness in the optical switching market. The report says that Ciena is expected to increase sales of its CoreDirector by 102% year over year. But competition from other players like Sycamore Networks Inc. (Nasdaq: SCMR) and Nortel Networks Corp. (NYSE/Toronto: NT) could eat into this growth and adversely affect revenues. Further reductions in capital spending could also hurt the company.

In the long haul market, Corvis Corp. (Nasdaq: CORV) is slashing prices of its equipment. While Ciena’s chairman, Pat Nettles, has continually denied that these pricing battles have affected Ciena, Morgan Stanley analysts and others in the industry say they suspect it will have a negative impact.

Pricing pressure, coupled with excess long-haul transport inventory in carrier hands, will continue to pressure the optical switching market. When will inventory levels return to normal? Morgan’s analysts say not until the second half of 2002.

Another closely watched area is Ciena's efforts in metropolitan networking gear. Specifically, the report cites a delay in the shipment of Ciena's new K2 metro product, which is expected to ship in October 2001, as a potential difficulty for the company in meeting the firm’s estimated metro forecasts. An initial version of the product is already shipping, but the report says that most customers are waiting for the 1.4 version, which will offer new features like VT1.5 grooming, full ATM functionality for DSL aggregation, and SDH compatibility for European customers.

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