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Ciena Casts Cloud Over 2002

Light Reading
News Analysis
Light Reading
12/13/2001

Ciena Corp. (Nasdaq: CIEN) reported solid quarterly and annual sales in its end-of-year earnings report (see Ciena Reports on Q4). But the good news was dampened by charges resulting in a loss of $1.8 billion for fiscal 2001 -- and by management's warning that the first quarter of 2002 will see a substantial drop in sales.

"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

  1Q01 2Q01 3Q01 4Q01
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
Diluted EPS $0.18 $0.20 $0.17 $0.05
Net loss       ($1.802 billion)
Gross margin 45.50% 45.60% 43.40% 39.80%


Table 2: The Year Behind and Ahead
  FY01 Est. Q102
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
http://www.lightreading.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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Litewave
Litewave
12/4/2012 | 7:26:30 PM
re: Ciena Casts Cloud Over 2002
While the vendor's CoreStream long-haul transport products suffered (falling about 30 percent this quarter), sales of the vendor's MetroWave products held steady,

I didn't know Ciena had such a product. Did you mean the MultiWave Metro instead?
BenGrahamMan
BenGrahamMan
12/4/2012 | 7:26:29 PM
re: Ciena Casts Cloud Over 2002
Here is a link to my yahoo briefcase where I have several spreadsheets etc.

http://y42.briefcase.yahoo.com...

and here are my CC notes ----------->

CIENA Corporation
December 13, 2001
Q4'01 (October 31, 2001 )
Conference Call Notes


http://www.ciena.com/news/2001...

http://www.ciena.com/investors...

Core Director > 20 % of revenues.

Raw Materials 161.8 M
Work-in-Process 75.7 M
Finished Goods 71.3 M
Reserve obsolescence 53.8 M

Inventory turns 3.5 X

Headcount at FYE was 3778, this is now 3338.

Long haul (LH) transport sales down 30 %, likely to decline in Q1'02. Customer base sheltered them for F2001, but that will end now. Carrier spending on LH has dropped dramatically. Next Generation Networks (NGN) will not shelter them as it did in past. LH traffic remains robust, so feels there will be a return to LH spending.

Metro revenue held steady. Had 16 customers. Announced Teleglobe as a Metro customer with a ring based system. MetroDirector K2 is going well. Recognized several customers in Q4'01.

CoreDirector (CD) G㢠very happy with it. Being deployed in volume. Has been shipped to 26 customers worldwide, from 19 last quarter. Revenues of CD were up > 60 % of revenues in Q4'01.

Gary Smith discussed market environment for Q1'02. Mentions dramatic capex reductions. It is not clear how long this will occur. Eventually carriers will need to start spending again. Question is when, and how do you operate until recovery occurs. Because Ciena thinks that recovery is inevitable, hence they will continue investing in their business. They will play to win and not survive. Says legacy competitors are in disarray. CIENA sees this as an opportunity. Hence sustained investment through this downturn. CIENA will continue heavy commitment to R&D. CIENA will constantly review market to ensure them that sustained investment is appropriate. Expects cash flow from operations in F2002 to be Găúnot negativeGăą. Deep pockets give them the allowability of sustained investment.

Guidance for Q1'02

* Revenues will be down sequentially from Q4'01 from 30 to 40 %.
* LH could be down more than 50 %
* CoreDirector should grow sequentially
* Gross Margins could be 30 G㢠35 %. This is a difficult number to gear on as there are many issues to deal with, such as cost of components, inventory obsolescence, sales, etc
* Other income 4 G㢠5 million dollars
* Eps loss of .04 G㢠12 per share. (I may have missed this)
* F2002 revenues to be down sequentially from 2001. Expenses will not reduce sequentially since investment in future will occur.

Gary Smith comments

* Claims CIENA is a contrarian. Mentions that investment strategy is contrarian, but will constantly reevaluate that strategy.
* CIENA claims they are aligned with the customers. Exclusive focus on Next Generation.
* CIENA goal is to capitalize on product and service in future.

Questions and Answers

* UBS asks about CoreDirector guidance. CIENA is confident on F2002 sequential growth. Customers can justify based on capex reductions and operating expense reductions. Some customers have not been announced.
* Ciena mentioned that much of Iaxis gear was sold off.
* Rick Shafer from CIBC (he is a key follower of Corvis) asked about pricing in optical switching. CIENA followed with mentioning no appreciable change in competive environment. Mentioned that they are not seeing any CD competition.
* Three 10 % customers were fairly evenly split in quarter. Qwest was a large % of the 10 % customers. Mentioned that CIENA has Găúgorilla status with CoreDirector Găú Metro space focus is on DWDM, believes combined features of CD in metro are compelling. CIENA's investment focus will be to infiltrate and dominate the metro space.
* Competitive point of view looks good. They are remaining paranoid as always, but not losing customers.
* Backlog for Q1'02 and Q2'02 is basically CD.
* Capacity utilization rate are not very high. As LH goes down and K2 and CD go up this increment doesn't change since outsourcing of these two products. Utilization around 50 %.
* Square footage of factory space not typically given out. Discussed that recent restructuring announcements will reduce by about 40,000 square feet.
* Sales force around 250 and this has gone up this quarter. Doesn't expect much change on this.



Bluebeam
Bluebeam
12/4/2012 | 7:26:28 PM
re: Ciena Casts Cloud Over 2002
Cienas's revenue in Q3 were 458M, not 258M as stated in the article. That means Q4 revenues are already 20% down from Q3

Bluebeam
Mary Jander
Mary Jander
12/4/2012 | 7:26:24 PM
re: Ciena Casts Cloud Over 2002
Woops! Fixed this too.
Mary Jander
Mary Jander
12/4/2012 | 7:26:24 PM
re: Ciena Casts Cloud Over 2002
Yes, that is what I meant -- and I've fixed this. Sorry and thanks for the heads up!
The_Holy_Grail
The_Holy_Grail
12/4/2012 | 7:26:17 PM
re: Ciena Casts Cloud Over 2002
Does anyone know the status of the Cyras product?
jggveth
jggveth
12/4/2012 | 7:26:16 PM
re: Ciena Casts Cloud Over 2002
I know CIENA has announced four customers for the product - Level (3), AFN, Beijing IDN and eAccess and the eAccess release talked about it running live 10G traffic.
bell-head
bell-head
12/4/2012 | 7:26:13 PM
re: Ciena Casts Cloud Over 2002
Harvey: there seems to be plenty of demand from carriers for identical products like Cisco's 15454, so I don't think you're statement about Cyras has any merit.
HarveyMudd
HarveyMudd
12/4/2012 | 7:26:13 PM
re: Ciena Casts Cloud Over 2002
Ciena recently reduced its workforce by cutting its low wage earners from its manufacturing plant. This action is not likely to reverse the fortunes of Ciena.

The greates threat to Ciena products does come from Nortel and Lucent because of their deep understanding of the carriers market. In addition the products from Nortel and Lucent are the most reliable products.

Ciena will never recover from its buy of Cyras located in California. Ciena boght Cyras for a price of about $2.5 billion. Ciena bought the company on the premise that Cyras had signed in about 70 customers. This oviously was not true and Ciena failed to perform due dilligence on the company in spite of misgivings of shareholders and analysts.

Ciena cannot make enough money on two or three customers it claims it has. In fact, Ciena would be lucky if it can recover its investment in the Cyras products in the next 10 years. Ciena perhaps did not bacout clause in the contract when it bought Ciena. Its fonders cashed out real quick and did not stick with the company.

Carriers have cyclical buying practice and they would not procure products simply because vendors want to create an artificial need for the products. Carriers have their products hardly deployed for a year or so when the vendors approach them to sell a new gear. This practice has to end as it does not work to the advantage of either the carriers or the vendors.

The economic downturn has nothing to do with the vendors demand for their products. There is simply no need for the newly annouynced products as they do not support the economic growth of vendors.



optigirl
optigirl
12/4/2012 | 7:26:12 PM
re: Ciena Casts Cloud Over 2002
Folks.....Harvey is NOT someone to take seriously. Just sit back and enjoy. It offers such a nice break in the action to read the stumbling rants and "say nothings" that he offers.

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