Following a disappointing earnings warning after the market closed last night, Ciena's shares were greeted this morning with a new round of estimate and price target downgrades on Wall Street (see Ciena Warns of Revenue Miss). Shares have lost nearly a quarter of their value in midday trading, dropping $0.62 (23%) to $2.14, a new 52-week low.
On the conference call Tuesday night, Ciena CEO Gary Smith continued to stick to his guns, saying he still had the support of Ciena’s board of directors. But in the wake of the call, analysts are raising questions about the wisdom of Smith's acquisition strategy, especially after showing weakness in the Catena business (see Gary Smith, CEO, Ciena, Ciena Buying Binge Alarms Analysts, and Ciena: Half Full or Half Empty?).
Several analysts say they're worried about the broad nature of Ciena’s sales weakness -- it crossed product lines and market segments. Ciena officials said that sales will not expand as earlier anticipated, because of the timing of some long-haul transmission and switching gear from a major customer, which some analysts have posited to be MCI Inc. (Nasdaq: WCIP). (See Ciena and Siemens Share MCI Glory.) And the company also reported disappointing sales from Catena, one of its most recent, and most promising, acquisitions (see Ciena Buys More Than Catena ).
Ciena officials blamed the Catena weakness on the DSL market, which they said wasn’t unfolding as anticipated -- which adds to mixed reports on what's happening in the DSL access business. (See Covad Cuts Q2 Loss, SBC RFP Refreshes Remotes, Verizon Wrangles Remote DSLAMs, Verizon Boosted by DSL, Wireless, and Shares Slump as Adtran Hits .) The Catena disappointment -- and interpretation by Ciena management -- caught the attention of some analysts.
"The company’s DSL commentary is a bit confusing for us," writes Jeffries Securities analyst George Notter in a research note issued this morning. "We note that the RBOCs are shifting DSL expenditures from large capacity central offices into DSL equipment sitting in other areas -- including DSL infrastructure for upgrading DLCs [digital loop carriers] to support DSL (i.e. Catena)...
”Longer term, we’re developing new concerns about the Catena business. Specifically, we’re concerned that operators might pull back on legacy DLC upgrades as they drive toward FTTP and FTTN network designs -- investments that are more easily capable of provisioning video over time."
UBS AG analyst Nikos Theodosopoulos says Ciena’s warning raises new questions about the growth strategy, which has largely been driven by acquisitions. “Ciena may be spreading itself too thin in new end markets while attempting to right size the business," he writes. Theodosopoulos has lowered his price target on Ciena, from $2.50 to $2.01 and says UBS is keeping Ciena with a Reduce rating.
In a note to investors, Theodosopoulos also notes that Ciena appears to be burning more cash than previously expected: “Cash balance of $1.3b was also disappointing, implying up to $150m cash burn vs. $90m guidance."
Other actions around the world of Ciena-bashing:
So what's likely to happen next? the pressure is now on Smith to right the ship, and fast. Several sources, speaking on background, say they now wonder how patient Ciena’s board of directors will be with Smith. Ciena has logged a series of quarterly misfires, and the growth-through-acquistions strategy has yet to pan out (see Ciena Falls Short, Ciena Seeks R-E-S-P-E-C-T, and Ciena Dampens Outlook Hopes).
Meanwhile, the lack of growth will put mounting pressure on the management to further cut costs to get closer to breakeven, say sources close to the company.
— R. Scott Raynovich, US Editor, Light Reading