Ciena's Day of Reckoning

The market downturn has finally reached Ciena Corp. (Nasdaq: CIEN). In a report that has Wall Street's knickers in a twist, the company that has so far been the Good Example of Optical Survival reported a mixed bag of quarterly news this morning (see Ciena Reports on Q3).

Topping the bill was a disappointing prediction that 2002 revenue growth would be "in the early teens" -- a far cry from the 85 percent to 90 percent growth anticipated for fiscal 2001.

Ciena's revenues for the quarter ended July 31, 2001, were $458.1 million, up 7 percent sequentially and 96 percent year over year. Adjusted net income, excluding a range of special charges, was $58 million for the quarter, or 17 cents per diluted share, compared with $65.4 million, or 20 cents per diluted share, last quarter (see Ciena Struts Its Stuff).

Gross margins were 43.4 percent for the quarter, compared to 45.6 percent last quarter. Ciena says the decrease came in part from excess inventories arising from a "faster than anticipated" demand for new products such as those equipped for OC192 (as opposed to gear that supports lower rates).

The company also announced an increased customer base -- 55 in total, compared with 49 last quarter and 33 the same time last year. Two customers, each accounting for more than 10 percent of revenues, provide 57 percent of the total between them. (Last year, the company says, three customers accounted for 78 percent of overall revenues.)

Customers are also coming from around the globe: International revenues are now 30.8 percent of overall sales, compared with 13.4 percent of sales this time last year.

Progress, surely. But Wall Street quaked at Ciena's guidance: Execs said next quarter's growth would be down 12 to 20 percent sequentially, while revenues for next year will be lower than first anticipated, due to slower growth in the long-haul transport market.

Ciena has a mixed message on long haul. On the one hand, the company says sales of its CoreStream long-haul platform grew 48 percent sequentially, driven by demand for 10-Gbit/s capabilities in the company's CoreStream product line. Long-haul gear will continue to dominate sales in 2002, the vendor says. And in the long term, Ciena sees the long-haul market driving the technological trends in carrier networks.

At the same time, though, ongoing market difficulties are causing the company to look away from long haul and toward core switching and metro product lines for near-term growth.

Specifically, Ciena's banking on solid sales of its metro transport and switching products to sustain its revenues next year. These products include the MultiWave Metro DWDM transport box and the MultiWave Metro K2, which was originally acquired with Ciena's purchase of Cyras, finalized in March 2001 in an all-stock deal valued at $1.1 billion.

All told, Ciena's hoping metro products will account for 15 percent of sales in 2002 -- compared with less than 10 percent now. The company says it's already ramping up the list of takers for the K2 switching products, with 10 expected to sign on by year's end.

Ciena's also made some changes to keep its metro products moving in the right direction. On today's call, execs announced that Alnoor Shivji, the Cyras cofounder who came to Ciena as CEO of the acquired company, has resigned to pursue other interests.

After the call, Ciena confirmed that "several other Cyras executives" have also left. While not volunteering their names, Ciena confirmed that they include cofounders Rafat Pirzada, Sunil Tomar, and Shekhar Mandal.

Jesus Leon, who has been overseeing Ciena's metro transport division, is taking over the K2 division as well. And while the two divisions remain separate and distinct for now, Ciena says it hopes to merge their product lines in an unspecified timeframe. Ciena believes that linking DWDM and switching will give it powerful competitive advantages over the likes of ONI Systems Inc. (Nasdaq: ONIS).

Many sources view the adjustments as positive -- including, unsurprisingly, Ciena's ex-CEO Patrick Nettles, who's now serving as executive chairman of the board (see Ciena's Changing of the Guard). In a talk at the Opticon 2001 conference this morning, Nettles remarked: "Regarding Cyras, we've announced a management shift this morning. I think the product will be integrated faster now that we've made that management shift." (See Ciena's Nettles: Trends Favor Us.)

But Ciena's not counting solely on metro for its good news next year. "We continue to be delighted with the reception of the CoreDirector," CEO Gary Smith told analysts. CoreDirector revenues were up 20 percent this quarter, and the product currently accounts for more than 10 percent of overall sales. Ciena hopes CoreDirector, including the new smaller-footprint CI version, will account for 25 percent to 35 percent of its 2002 revenues.

Analysts say Ciena is right to look beyond long haul. "If there's any good news in this report, it's in the K2 and metro transport product predictions," says Tim Savageaux of W.R. Hambrecht & Co. But he says the degree of challenge implicit in Ciena's grim guidance will be hard to offset.

Others concur. "We're very bullish on Ciena's metro line, but long haul is still 75 percent of sales right now," says Rick Schafer of CIBC World Markets. He says the high growth of CoreStream this quarter was offset by weakness in Ciena's older long-haul products, such as the MultiWave Sentry series.

Ciena's hanging tough in the face of analyst downgrades, restating its belief that carriers inexorably, if slowly, are moving to replace legacy Sonet and TDM gear with optical.

"There will continue to be a cleansing of financial inefficiencies and widespread adoption of new technology," said Smith. "We think investment decisions should be made less on short-term performance than on belief in who will be the survivors... We believe passionately in next-generation market opportunity and long-term value."

Smith's eloquence failed to sway unforgiving investors. Ciena shares plunged on the news: At press time, they were trading at $19.03, down 9.09 (32.33%).

— Mary Jander, Senior Editor, Light Reading
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optical 12/4/2012 | 7:56:47 PM
re: Ciena's Day of Reckoning The Cyras Founders were FIRED. Just ask anyone who works there and they will tell you that the founders were roadblocks in getting anything done. The K2 still does not work. That should tell you something.
fiber_flip 12/4/2012 | 7:56:47 PM
re: Ciena's Day of Reckoning Any scoop on why so many Cyras folks left? Were they fired? I cannot imagine that they are looking for greener pastures in this environment.
sonet49er 12/4/2012 | 7:56:45 PM
re: Ciena's Day of Reckoning Good Acquisitions:

CoreDirector Product by Ciena

Cerent by Cisco
night_reading 12/4/2012 | 7:56:45 PM
re: Ciena's Day of Reckoning The K2 still does not work.

Looks like the aquisition business is generally turning out to be a bad idea.

Is there any M&A success story recently?
lightmaster 12/4/2012 | 7:56:45 PM
re: Ciena's Day of Reckoning The Cyras stuff does sound fishy.

On the positive side, I am sure that Lucent and Nortel would KILL to have the bad news that their revenue growth was dropping from 100% to 20%. I am also sure that Ciena is being conservative to avoid shareholder lawsuits because NOBODY can predict 2002 at this point.
sonet49er 12/4/2012 | 7:56:45 PM
re: Ciena's Day of Reckoning 1) If you read the acquisition documents it would be clear that the Cyras founders got an added year of vesting if Fired or if they "Resigned for a Reason". They were probably fully vested in their shares at this point.

2) If you compare the LightReading Press of last year on how the K2 was doing vs. How Ciena is touting the K2 in their quarterly reporting you see a disconnect.
joe_average 12/4/2012 | 7:56:44 PM
re: Ciena's Day of Reckoning Interesting discussion on successful M&As but how about a good venting on the worst M&As in telecom history?

I vote for the "Nortel + Bay" $7B debacle. Is there anyone left at the old Bay offices to turn off the lights?

"Lucent + Ascend" can also be a candidate. Although the product line was successful, did it ever recoup the $30B (?) initial price that was paid? The entire company is only worth $20B now.

Actually thinking more about it, "Nortel + anyone else" is just as likely to win top honors (STC and Optera excluded).

From all the Alcatel bashing that I've been reading about lately, there are probably many potential winners there as well.

^Eagle^ 12/4/2012 | 7:56:44 PM
re: Ciena's Day of Reckoning successes:

Cisco: Cerent *however, expect Cerent slowing if you could really dissect how each division is doing. It is successful...but 6.9B successful? Look for slowing growth and no further gain in market share for this platform...they will continue to grow revenue here...but at slower more normal pace. Can Cisco live with normal margins and revenue growth?

Cisco: Stratacom. Allowed Cisco to be #1 in Frame Relay sales to carriers for a time. Best tool they ever had to help penetrate telco's. Without Stratacom, it would be doubtful they could have done as well with Cerent. Line is fading now...but for several years it was hugely successful and a big revenue generator. for awhile, Stratacom was installing over a switch a day in ATT network alone....

Cisco: Crescendo, Kaplana,: allowed Cisco to dominate ethernet swithing to desktop and in campus environs. Tools that allowed them to reach dominance over Synoptics/Wellfleet = Bay Networks. There was a moment when Bay looked like it would be huger than Cisco....and should have been but for bungled merger. Arguably they had far better router technology at the time and better ethernet switches. but merger was a flop...they could never integrate successfully...and cisco caught up and passed combined size of Synoptics and Wellfleet.

Lucent: Ascend / Cascade; allowed Lucent to dominate Frame Relay, and also ATM switching in the core. Huge revenue for Lucent for several years. Hugely successful for Lucent. Some issues in integration of Cascade...but overall great success. Big big revenue generator for years. Also the Ascend portion of company generated great revenue for several years, all those dial up access concentrators!; really built the internet industry with these. If you are dialed up right now to the net, you are highly likely to be dialing through an Ascend box.

More recent MA has indeed been a failure. But there have been several noteworthy ones out there. The above is a good start.

lightmaster 12/4/2012 | 7:56:43 PM
re: Ciena's Day of Reckoning Good ones so far. Here are some more...

Cascade/Saharra (Dan and Desh buy a dog from Jonnathan Reeves)

Cascade/Sirrocco (Dan and Desh buy the exact same dog from Jonnathan Reeves)

GJ 12/4/2012 | 7:56:43 PM
re: Ciena's Day of Reckoning Ascend/Lucent a successful merger? HARDLY! I was there (and they merged in 1999 so yur comments of "many years" are odd). Most of the Ascend brains bolted early to Zhone or Sycamore and fo most of us involved the merger was a complete failure.
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