Ciena: Half Full or Half Empty?

Is Ciena Corp. (Nasdaq: CIEN) missing too many opportunities in the telecom rebound?

The question is pertinent because, following the company's revenue shortfall announcement last week, some sources now say Ciena has had some other business slip away during the quarter, in addition to the slower-than-expected DISA orders (see Ciena Falls Short).

Two rumors have hounded the company lately, both initially reported in the Light Reading Insider. There is speculation that AT&T Corp. (NYSE: T) has finalized a deal with Siemens AG (NYSE: SI; Frankfurt: SIE), which could spell trouble for Ciena's repeat business there. For fiscal 2003, AT&T and Qwest Communications International Inc. (NYSE: Q) combined to contribute about 25 percent of Ciena's total revenues, according to the company's SEC filings.

The other rumor making the rounds is that Sprint Corp. (NYSE: FON) sided with Sycamore Networks Inc. (Nasdaq: SCMR) over Ciena in a recent RFP, choosing Sycamore's SN 16000 optical switch for its meshed optical network.

Ciena won't comment on the rumors. But the company candidly admits that the long-haul market won't keep it fat and happy. "We've been very clear that our business plan is not based on the core market rebounding in the near term, and we've also not been shy about articulating our strategy of putting pieces in place in adjacent growth markets," says a Ciena spokesman.

The bad news? First, Ciena is still heavily dependent on its core transport and switching products; they contributed about 40 percent of the company's total revenues last quarter.

The second problem is that Ciena's revenues from its metro networking products -- which all came from acquisitions -- were down last quarter, contributing about 24 percent of the quarter's total revenues. Even if the long-haul DWDM market improves in the next two years, the market will be more competitive then, and Ciena can't afford to wait it out, according to Scott Clavenna, chief analyst at Heavy Reading. "If Ciena continues to lose business to Siemens and other rivals to its switching business, it's hard to see how they ever get back to breakeven without a big push from their metro products," he says.

How's the push coming? Ciena's Wavesmith and Akara acquisitions are coming along, but not adding much new business outside of what each company brought in when acquired, say sources close to Ciena. Also, Ciena has noted that its partnerships with Laurel Networks Inc. and Luminous Networks Inc. are still young and haven't become significant revenue contributors.

Ciena has said it wants to expand its edge and data products to where they're contributing 30 percent or more of the firm's total revenues. In 2003, those product lines only represented 7 percent of revenues. And not a week goes by without Ciena being mentioned in some acquisition rumor or other (see M&A's New Currency).

In short, the company faces a challenge to improve its new businesses, all the while keeping the old stuff healthy. "They're trying to simultaneously diversify away from the core and try to get into more meaningful entrée into ILECs and PTTs," says Gabriel Lowy, an analyst with Blaylock & Partners (see Ciena Seeks R-E-S-P-E-C-T).

Analysts expect Ciena to lose about 8 cents a share on revenues of about $69 million during its first quarter of 2004, which ended Jan. 31, according to Thomson Financial Securities Data. While Ciena's revenues will only be slightly down for that quarter, its earnings per share are expected to slip 27 percent compared to the year-ago period.

The company will be among those systems vendors exhibiting at OFC.

— Phil Harvey, News Editor, Light Reading