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Ciena Boasts French Fancier

Ciena Corp. (Nasdaq: CIEN) put its best foot forward this morning, announcing a leap in third-quarter gross margins and a new deal with France Telecom SA (NYSE: FTE). But it's too soon to call it a comeback. (See Ciena Posts Q3 Loss.)

The vendor posted revenues of $110.5 million, up about 6 percent sequentially and roughly in line with analyst estimates of $109.9 million. Net loss was $51 million, or 9 cents per share, but one-off items not reported under GAAP (generally accepted accounting principles) cut that quarterly loss to $21.6 million, or 4 cents a share, in line with estimates.

Gross margin came in at 34.1 percent, up from 26.2 percent the previous quarter. Ciena expects fourth-quarter revenues to increase by a further 5 percent sequentially, which would be $116 million, a few million ahead of current analyst expectations. That could help boost gross margins closer to Ciena's target of 40 percent.

CEO Gary Smith said the company's improvement wasn't due to any one large deal, customer, or single product line, but was the result of a broader product mix and lower manufacturing and operational costs, including some headcount reductions at the former Catena site in Ottawa (see Looking at M&A Aftermath ).

That wasn't the only good news Smith had to impart. France Telecom chose the company's CoreStream WDM platform in July, following an initial deployment in April. The deal generated some revenue in the third quarter (see Ciena Wins at T-Online and BT's 21CN Deals: Booty or Bloody? ).

The France Telecom deployment, about which Ciena gave no details, follows the supplier's first entrée into Deutsche Telekom AG (NYSE: DT) in support of the carrier's T-Online business, and the 21CN engagement with BT Group plc (NYSE: BT; London: BTA).

Smith said such international deals are still at an early stage, noting that they need to "translate into large deployments" before meaningful revenues can be booked. He added that he couldn't offer any update on the 21CN engagement other than to say that "negotiations are ongoing... BT has asked us not to comment on the dollars or the timing."

Smith also touched on growing opportunities in the enterprise market as networking equipment prices drop and large companies focus on business continuity issues. "There are a lot of large enterprises looking to build their own networks, and some are as large as, or even bigger than, carrier networks."

So when might Ciena, which has more than $1.1 billion in cash and investments, claw its way out of the red and into profit? The company's management declined any prediction, but analysts at Credit Suisse First Boston Corp. reckon Ciena needs to reach its 40 percent margin target and reach quarterly revenues between $150 million and $170 million before it crosses into profitable territory. In a research note, the CSFB team estimates this could happen as early as the end of fiscal 2006 or early in fiscal 2007.

Investors seem skittish, despite the cheerier outlook. When the results were unveiled early this morning, Ciena's share price climbed by 5 cents, more than 2 percent, to $2.30 in pre-market trading. After the call, Ciena's stock u-turned and headed south, where it currently sits at $2.12, down 13 cents, more than 5 percent, compared with yesterday's closing price.

— Ray Le Maistre, International News Editor, Light Reading

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