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Ciena's Ugly Day

Shellacked. Blitzed. Annihilated. Is there any other way to describe what's happened to Ciena Corp. (Nasdaq: CIEN) -- and its credibility with Wall Street -- this morning?

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:

  • Lehman Brothers analyst Marcus Kupferschmidt has trimmed his price target to $2.25 from $3.50. Kupferschmidt has also dropped 2004 revenue estimates to $340 million from $417 million. In a research note, Kupferschmidt mentions one "positive," noting that Ciena has reduced operating expenses below the former guidance.

  • Morgan Keegan & Company Inc. analyst Simon Leopold has reduced his 2004 sales estimates to $311 million from $349 million. Leopold also urges investors to stay away from the shares, saying they remained "fundamentally pricey." He writes that a $1.00 share price represents the downside risk to the shares, based on his estimates for net cash per share at the end of 2004.

    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

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    optical 12/5/2012 | 1:23:49 AM
    re: Ciena's Ugly Day How does the Ciena BOD continue to support this free fall? I don't blame Gary Smith at this point because he is doing what he feels is right, but the BOD has to step up and do their job..... get a new CEO to save this company before all is lost.
    zillionaire 12/5/2012 | 1:23:48 AM
    re: Ciena's Ugly Day They are one big happy bunch of parasites. A new CEO will start to dismantle the club....and we can't have that now can we?
    hiflier 12/5/2012 | 1:23:48 AM
    re: Ciena's Ugly Day As noted from time to time on this forum and others, Ciena senior management have no clue about how to create a sales environment that wins. Gary is the problem because he cannot attract or retain top sales management talent as evidenced by the merry-go-round at the sales management positions. So while his strategy of growth through acquisition may be sound, Ciena will be unable to execute to take advantage of the opportunities created because they can't build a cohesive sales strategy. The disparate nature of the market segments (from access, to long haul, to storage?) complicates the issue. Trying to emulate Cisco because you have been on CNBC just like Chambers isn't the path to sucess here. Cisco can do it because they are Cisco, Ciena is, well, not.
    oni_guy 12/5/2012 | 1:23:47 AM
    re: Ciena's Ugly Day
    I know in theory that a CEO reports to BOD.
    But in Ciena's case, it looks that most of their
    directors were hand picked by the company; they
    are not from VCs (only one from VC?).

    How could they get rid of Smith? Wouldn't this
    lable them as a trouble maker and nobody wants them as a director if they do that?

    It looks like a director often times doesn't get paid. How does this thing work in general and Ciena in particular?
    Hey I am just an Engineer so I don't know those things.
    LightCycle 12/5/2012 | 1:23:45 AM
    re: Ciena's Ugly Day > Ciena officials blamed the Catena weakness on
    > the DSL market, which they said wasnGÇÖt unfolding
    > as anticipated --

    As anticipated by whom?

    Sounds to me like maybe Catena was blowing smoke up Ciena's ass before the acquisition, and now the reality is beginning to hit home, a quarter too late (anyone remembers how to spell C Y R A S ... ? ;)

    > 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.

    What they said is that 50% of the shortfall is from 2 major customers, one long haul related, likely MCI, and another, an International customer for switching, likely BT - probably explains why the former UK based Global VP of Sales buggered-off, before Gary's axe fell for bungling BT ;)

    No explanation of the remaining 50% of the shortfall, and none of the analyst seemed to be interested either.

    Anyone wants to speculate?
    inauniversefarfaraway 12/5/2012 | 1:23:39 AM
    re: Ciena's Ugly Day LightCycle,

    Your surmise that Catena was "embelishing" may be accurate.

    What sort of team lurks within Catena? One of their chief's claims to fame is to have invented and deployed the "one meg modem" while at Nortel. This product was touted as being part of a billion dollars worth of business. Yet, is it true that Jim Hjartarson, and his four other partners, left Nortel almost a year before the "one meg modem" deals broke, or before the product actually made it into the system in the form of productized chips?

    Did the vc community avoid their "due diligence"?

    What is curious is why a management team would take credit for something they didn't believe in?
    And by that I mean specifically that management usually sticks around long enough to get full credit for projects this big by seeing them through to deployment. Perhaps they didn't believe in what they were doing, or they didn't have a clue it was going to be as big as it was.

    Presently, the facts are that their products don't sell. Either recent hype is overblown, or there is something wrong with Ciena's story.

    Maybe the team at Catena is inept? This company received $200M+ of funding, and was sold for about $487M. That is a joke, since standard VC ROI mandates something like $2B. Also, they apparently reverse engineered the Lucent switch, and built some custom silicon to do this. How did this get past the vc's: blowing venture capital to reinvent the wheel?

    In closing, the quarters ahead should prove interesting for Ciena. Pink slips anyone?

    far'y
    free_lance_writer 12/5/2012 | 1:23:39 AM
    re: Ciena's Ugly Day We totally agree with you.
    Actually, catena' product is not like they said about. Their OA&M, EMS, NMS&OSS softwares are very bad, Particully the EMS software because at the company, there is nobody knows about EMS, NMS&OSS. That's why they sold the company, but at the end of the day, they didn't get what they hoped for. Only talented people can make high quality software.
    inauniversefarfaraway 12/5/2012 | 1:23:38 AM
    re: Ciena's Ugly Day LightCycle,

    On another line of thinking, this hiccup is probably part of the master plan to usurp the power structure at Ciena.

    Remember Bob Machlin, and how he was mysteriously ousted from the CEO position at Catena? Maybe this is the same game! Bob left the company, discouraged that he couldn't take the company to profitability, or so the press reads. Once he leaves, Jim Hjartarson takes the helm, and about a half-dozen titles. Sales materialize out of the blue, and Catena reaches profitability a little later, again as the press reads.

    Think about it for a minute. Gary Smith is in a bad place, and needs a new business strategy. Gary confides in the leadership at Catena. No problem they say, we're on your side. Who feeds the numbers to Smith: could it be Jim Hjartarson? Maybe Jim is just angling for the top job, and since he's go the key to the hen house, well you just do the math.

    What if Gary takes all the heat for a few quarters, and if he doesn't survive, who do you think can be the new leader? What if there is a sudden revival in the DSL business?

    I'll get the popcorn.

    far'y
    Kumite 12/5/2012 | 1:23:37 AM
    re: Ciena's Ugly Day What happened to that $100 million dollar deal? Obviously that is not working out either? Maybe DISA and SAIC have figured out Ciena is going to go under and are going to recompete the optical line system.

    It would be a real drag to deploy the very foundation of GIG-BE and then have the company go out of business.

    Kumite
    paolo.franzoi 12/5/2012 | 1:23:37 AM
    re: Ciena's Ugly Day
    Its a whole lot simpler than that.

    1 - The Catena Cards for the SLC-5 are a nice little business. They have a limited market (SLC-5s) and its not getting any bigger. They have competition from Adtran style overlay DSLAMs.

    2 - The BLC product is going nowhere. It has no customers (Occam has more as far as I can tell). The idea of a high end China market was opium smoking.

    So, the problem with Catena has always been the following:

    - Buy the Card Biz for $100M
    - Nuke the rest of the stuff, its worth approx $0

    Unfortunately, Ciena plays the hype model into the market (They should be valued at almost 0/share given where they are). So, they believe it about the acquistitions.

    So, ask yourself the following:

    If the money spent for Catena, was based on selling the BLC. Who was it going to sell to? BLS, SBC or Vz? They all have initiatives in another direction. Best thing that Ciena can do, is a - fully fund the card business (and see if they can do cards for AccessNode) and b - shut down the rest of Catena.

    A bitter pill to swallow, but there it is.

    seven
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