"Right now there is a great deal of uncertainty, and we don't have a good idea of when that's going to change," CEO Gary Smith told Light Reading in an interview this afternoon. "The carriers' goal is to reduce capex. I think that is certainly driving a lot of behaviour, a lot of cash conservation. The carriers are trying to get to a normalized model."
But Smith said Ciena won't reduce its own investment in the business while waiting for carrier spending to stabilize. "We've taken great market share in the last year, and we have a strong balance sheet and we intend to invest that wisely."
The upshot of all this is a definite mix of good and bad news. First the good news: Ciena posted $367.8 million in quarterly revenues, up 27 percent year over year. Five new customers joined Ciena's roster, bringing its total to 60. International sales rose slightly to 31.6 percent of the total, up from 30.8 percent last quarter. Diluted earnings per share were $0.05, gross margins at 39.8 percent.
While the vendor's CoreStream long-haul transport products suffered (falling about 30 percent this quarter), sales of the vendor's MultiWave Metro products held steady, and the CoreDirector optical switch accounted for over 20 percent of quarterly revenue. Seven new CoreDirector customers signed on this quarter.
”CoreDirector has met robust acceptance,” Smith said. And he seems unconcerned about potential competition from the likes of Lucent Technologies Inc. (NYSE: LU) and Nortel Networks Corp. (NYSE/Toronto: NT). “Whilst we remain suitably paranoid, we have a good headstart," he said, noting that Nortel's OPTera Connect HDX switch would have been more of a threat had it been launched two years ago. (See No Riches From Optical Switches for more on Ciena's competitors.)
Now, the bad news: Thanks in part to restructuring to meet the downturn (see Ciena Boosts Numbers, Cuts Jobs), as well as ongoing goodwill losses resulting from the purchase of Cyras Systems earlier this year (see Ciena Completes Cyras Purchase), Ciena took some hefty charges. These resulted in a net loss of $5.51 per diluted share.
Ciena thinks it will continue to see long-haul losses, perhaps to the tune of 50 percent less revenue in the coming quarter. It's also clearly not confident that the MultiWave Metro K2 platform it acquired from Cyras will take the world by storm, although several new customers have bought it.
"The product is going well, and we have recognized revenue," Smith told Light Reading today. "We have a number of things to do to increase its marketability. It's a portfolio play for us as a feeder into CoreDirector." Smith said the addition of SDH capabilities and Osmine certification (a must for selling to RBOCs), plus further integration of the K2 with other Ciena products, will help the situation. But perhaps not until late in 2002.
Overall, Smith's key message today was that carriers will eventually be forced to upgrade their networks to meet underlying demand, and that Ciena will proceed apace in spending on its business, in an effort to maintain its competitive advantage through the downturn.
"We have chosen a sustained investment strategy to tap inevitable recovery. That position opens up more options. We can play to win, not just to survive," he said in a conference call with analysts this morning. Ciena will keep its R&D and sales spending as high as possible, even if that incurs some operating costs.
But this tack, coupled with market trends, will result in a revenue drop between 30 percent and 40 percent for the first quarter of fiscal 2002, execs said. Gross margins are expected to drop at least 5 points, and earnings per share will fall between negative 8 and negative 12 cents.
Wall Street collectively balked at the news. At press time, shares had fallen $2.63 (14.64%) to trade at $15.34.
Individually, analysts seem to think the results are acceptable, although some of the underlying numbers are worrisome. “The report doesn’t look all that bad,” says Chris Bulkey, research analyst for Optical Oracle, Light Reading’s subscription service. “The charges are a cause for concern, but they're profitable and their revenues look good.”
”Commentary from management highlighted a greater level of uncertainly overall in the business, and the tone was more negative than previous discussions,” writes Steve Levy of Lehman Brothers in a note today. He also expresses “alarm” at the increase in accounts receiveable through the quarter, since it seems to “suggest how hard Ciena is working to close deals in this constrained spending environment.”
Another cause for concern, according to Levy, is the intense concentration in Ciena’s customer base. On today’s call, execs acknowledged that three customers accounted for nearly 67 percent of the vendor’s 2001 revenues. And when questioned, they revealed that much of that percentage was down to Qwest Communications International Corp. (NYSE: Q). That’s too concentrated for comfort in Levy’s book.
Some think the latest earnings report is evidence that the times just took a while to catch up to Ciena. "Ciena and Corning were the last of the optical companies to be hit by the downturn,” says David Jackson of Morgan Stanley Dean Witter & Co. “When their sales were hit, they were hit dramatically.”
Jackson isn’t entirely swallowing Ciena’s attempts to spin its losses in a positive light. “Perhaps this is more a case of belated expense reduction than strategic spending.”
Below is a summary of Ciena's earnings for the year and links to key stories in Light Reading:
Table 1: Ciena: A Quarterly Look
|Revenues||$352 million||$425.4 million||$458.1 million||$367.8 million|
|Adjusted net income||$54.1 million||$65.4 million||$58 million||$17.1 million|
|Net loss||($1.802 billion)|
Table 2: The Year Behind and Ahead
|Revenues||$1.6 billion||$239.07 million (average)|
|Adjusted net income||$195.3 million||N/A|
|Diluted EPS||$0.60||($0.08 to $0.12)|
|Net loss||($1.8 billion)||N/A|
|Gross margin||43.60%||32.5% (average)|
Ciena's Day of Reckoning
Ciena Struts Its Stuff
Ciena: What Slowdown?— Mary Jander, Senior Editor, and R. Scott Raynovich, US Editor, Light Reading
Editor's Note: Light Reading is not affiliated with Oracle Corporation.