Ciena Gets a Grilling

Ciena Corp. (Nasdaq: CIEN) CEO Gary Smith was forced onto the defensive during a conference call today as analysts pressured him over the firm's cost-cutting policy and its acquisition strategy.

The grilling came as Ciena announced second-quarter revenues of $74.7 million, short of analysts' expectations, and a net loss of $76.2 million (see Ciena Closes Q2). That sent the stock into a spiral, and by early afternoon Ciena's share price was down by 49 cents, nearly 13 percent, at $3.39.

That values the company at $1.6 billion. If the stock falls any farther, the vendor won't be worth much more than its total assets, which currently stand at $1.46 billion.

That sort of reaction is clearly irking Smith. He told the conference call that Wall Street underestimates the commitment of Ciena's management team to fix the company's business model.

That involves increasing revenues and cutting costs, both of which are happening, says the CEO. The company is forecasting third-quarter revenues up to 30 percent higher (about $97 million), while ongoing cost-cutting programs will see the company reduce its quarterly opex costs to between $65 million and $70 million by the first quarter of the 2005 financial year.

Operating costs in the second quarter were $83.3 million, but will jump to between $90 million and $94 million in the current quarter due to the cost of Ciena's recent acquisitions (see Ciena Completes Acquisitions).

A major part of the cost-cutting operation involves the culling of 425 jobs in San Jose, Calif., a "difficult but necessary" process that has now begun (see Ciena Cuts 1/4 of Staff). That cut will account for a quarter of the 1,702 staff Ciena had at the end of the second quarter (which didn't include the 380 coming with Catena and Internet Photonics), prompting one analyst to question whether Ciena will have enough staff to deal properly with its big-name carrier customers, such as BT Group plc (NYSE: BTY; London: BTA), MCI (Nasdaq: WCOEQ, MCWEQ), and Verizon Communications Inc. (NYSE: VZ).

Smith says the company can cope because it invested heavily during the downturn, particularly in its core optical products. "It's timely to decrease investment there and rebalance towards our access platforms. We're not jeopardizing our competitive position," and "we're making every effort to make sure we don't impact our customers."

But the job losses in San Jose won't be the end of the staff cuts. A Ciena spokesman says there will "probably be additional" job losses, but that the 425 in San Jose is "the biggest push." He denies that another 300 positions are about to be cut, as suggested yesterday by TheStreet.com. "We don't have plans in place that involve that sort of number," he says.

It's not only the headcount situation that's worrying analysts. One questioned whether Ciena's acquisitions were paying off, saying that the firm's "track record is not showing too well." (See Ciena to Acquire Akara and Ciena Nabs WaveSmith.)

Smith's response? The WaveSmith and Akara markets are still at the early stages of their growth, and it's going to take a while for revenues from those acquisitions to really kick in, says the CEO, noting that, while Verizon Communications Inc. (NYSE: VZ) has deployed Wavesmith technology, no revenues have yet been recognized from that deal (see Ciena Seals Verizon Deal).

— Ray Le Maistre, International Editor, Boardwatch

OpticOm 12/5/2012 | 1:45:30 AM
re: Ciena Gets a Grilling The HR professionals say that a company cutting more than 25% of its work force does not stand much of a chance to survive.
If you couple that with the continued weakness in the telco market, I think you can draw your own conclusion.
oni_guy 12/5/2012 | 1:45:29 AM
re: Ciena Gets a Grilling
To be fair, LU and NT cut more than 60% and
looks they are going to be ok.

Gary Smith used to say inside company that Wavesmith was doing great. Now he says it hasn't pciked up yet.
Looks to me he either didn't tell the truth to the eomployees or he didn't to the Wall street.

I think Ciena needs to get a new CEO.
lightmaster 12/5/2012 | 1:45:29 AM
re: Ciena Gets a Grilling Smith said: "...Wall Street underestimates the commitment of Ciena's management team"

I don't think Wall street cares about your commitment. They care about competence and results. Some even believe that the two are related.
OpticOm 12/5/2012 | 1:45:29 AM
re: Ciena Gets a Grilling Both LU and NT were much larger and overstaffed companies, especially LU. And it is a stretch to say they are doing OK...
Ciena was a start-up and its customer base is much narrow.
I stick to my guns.
JoeBagadonuts 12/5/2012 | 1:45:28 AM
re: Ciena Gets a Grilling What did you expect? Honesty? Integrity? This guy is a joke, he's lined his own pockets at the expense of shareholders and employees, he's chased after every dollar in sales he could lay a hand on while pissing away cash reserves and alienating his core customers.

Go back and look a year and a half or so ago on these boards and one can see that there have been serious questions raised on his leadership and the results that he has produced.



lagreuse 12/5/2012 | 1:45:25 AM
re: Ciena Gets a Grilling I'll second that Zillionaire. Who's going to turn down $3mm a year? It's remarkable how these boards continually get off scott free when, in fact, they are the real problem.
zillionaire 12/5/2012 | 1:45:25 AM
re: Ciena Gets a Grilling The good news for Gary is that they only lost 76 million this qtr. Results like that will get him another 3 million dollar bonus. In spite of what people think, the only real whacking going on is happening in the board room by the group that should be acting on behalf of the shareholders.
SolarSailor 12/5/2012 | 1:45:22 AM
re: Ciena Gets a Grilling > Smith said: "...Wall Street underestimates the > commitment of Ciena's management team"
> I don't think Wall street cares about your
> commitment. They care about competence and
> results. Some even believe that the two are
> related.

What management team!? More than a third a gone!

Other than Nick Jeffrey who's being replaced by Jim Collier, with little explanation from Gary Smith, hes is not telling Wallstreet about the rest of "management" thats abandoning ship!
falsecut 12/5/2012 | 1:45:19 AM
re: Ciena Gets a Grilling Like a lot of companies, this CEO is doing fine for himself, and sticking it to shareholders. It's a shame that so many boards just don't seem to care. Of course, maybe that's why they were picked for the board.
shadowpawn 12/5/2012 | 1:44:49 AM
re: Ciena Gets a Grilling 30% growth next quarter? How? Upcoming quarter is one of the slower ones in the field. Their staff are leaving in droves. Hardest hit are the sales folks. They know that going to another company means better pay, achievable bonuses and more respect for their efforts. Margin fall... means that their prices have to be discounted so great just to compete. Slam dunk and game over Seeya Ciena. Master and Commander Smith just needs to hang in to the game of Ciena until December 2004 for another nice bonus. Ring...a-ding....ding. Hang on Snoopy....Snoopy hang on. Stockholders take it like men. We hoped to get the glamorous women and the silk suits.
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