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Ciena Looking to Merge Away Misery

Light Reading
News Analysis
Light Reading
5/23/2002

Ciena Corp. (Nasdaq: CIEN) this morning set its sights firmly on the future -- probably the only choice, considering the lower revenues and significant losses for its second quarter of 2002.

Ciena posted revenue of $87.1 million for the quarter ended April 30 -- compared to $162.2 million last quarter. Its net loss under GAAP was $612.2 million, or $1.86 per share. Last quarter, the company's GAAP-reported net loss was $70.6 million, or $0.22 per diluted share (see Ciena Closes Q1).

The company expects to see a loss per share next quarter between $0.17 and $0.19.

The quarter was also marred by an assortment of special charges. Operating losses, restructuring costs, and other charges amounted to over $404 million.

The company claims the restructuring and layoffs have paid off, and that no further cutbacks are expected (see Ciena Slashes Some More). "We expect to see additional benefit of those actions in our financial results for our fiscal third quarter," said CEO Gary Smith in a prepared statement. The company is done with the bulk of the restructuring, execs say.

The company's pitch to investors now appears to be that it will merge its way out of misery -- officials are waxing positive on its anticipated merger with ONI Systems Inc. (Nasdaq: ONIS), now set to close in late June (see Ciena and ONI: Wedding of the Year?). Ciena's next quarterly report in late August will include ONI financials. No new revenue guidance will be given prior to that call.

Ciena is also looking to the international market for financial renewal. Throughout today's conference call with analysts, company executives stressed the company's new emphasis on international carriers. Last quarter, international customers accounted for 22 percent of Ciena's overall sales. This quarter, that figure is up to about 43 percent.

"The pivotal issue is not so much about capex going down or up, but how many of these large incumbent carriers can Ciena penetrate as quickly as possible," Smith said.

Smith said Ciena now claims 5 to 10 percent of the optical equipment revenues of the world's top 30 to 35 carriers but wants to grow that to 15 percent. The key tactic will be to provide solutions that include both transport and switching -- at first in separate boxes, moving toward further integration over time, and led by the company's flagship CoreDirector grooming switch.

Ciena says sales this quarter show a balance in acceptance of the company's switches versus traditional long-haul transport gear. For the first time, sales of CoreDirector and MetroDirector K2 switches represented more than 50 percent of Ciena's quarterly revenues, ahead of traditional CoreStream transport products.

Ciena would not break out the proportion of metro switches in the above figures, but it says the market for metro DWDM is also picking up internationally. Of the company's top four customers, two are using the CoreDirector exclusively and two are using a mix of CoreDirector and other products. (Ciena says the four top customers include two international carriers and two domestic ones and there is no trend toward favoring metro versus CoreDirector in any region.)

Ciena has scored a major win with an unnamed international PTT, one it says has not been a customer before. China looks promising too: About 10 percent of all revenues this quarter came from China, execs say.

On the homefront, Ciena expects a slow takeup in the RBOC market, even though it is proceeding apace with efforts to obtain Osmine certification with Telcordia Technologies Inc. By the time that certification is completed, Smith said, the RBOC market should be starting to pick up as a result of capacity requirements tallying with ongoing customer demand for bandwidth -- an "inflection point" Ciena expects to see sometime in 2003.

Ciena's international focus is apparently a hard-learned lesson, resulting from setbacks at customers with large domestic presence, specifically Qwest Communications International Inc. (NYSE: Q) and Sprint Corp. (NYSE: FON). Ciena took a hit last quarter when these important customers fell on hard times (see Ciena: Outlook Dim).

But despite Ciena officials' positive assurance, skeptics abound. Chatter from several sources has it that Ciena's rollout of gear at AT&T Corp. (NYSE: T), the result of a much-touted contract win (see AT&T Boosts Ciena, Cisco), has not gone as smoothly as AT&T would have liked. Some sources say Ciena ran into problems of scaleability there. Ciena denies these speculations, saying there's been nothing out of the ordinary about the AT&T deployment, and claims it's completed more than half the requested installation, although execs would not say on today's call what revenue they've realized so far from the arrangement. (Ciena says its policy is not to release any revenues for specific customers.)

Indeed, with the telecom market still mired in a deep economic slump, many challenges remain for the company. Questions still surround Ciena's ability to deliver a combined transport and switching platform to international carriers, especially since the company continues to cut spending on R&D along with other operating costs.

At press time, Ciena shares were trading at $5.99, down $0.45 (6.99%).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com

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let-there-be-light
let-there-be-light
12/4/2012 | 10:20:47 PM
re: Ciena Looking to Merge Away Misery
..is based on the questionable principle of, "Two or more sinking ships tied together will sink more slowly than one ship on its own."
gea
gea
12/4/2012 | 10:20:46 PM
re: Ciena Looking to Merge Away Misery
Well, I have heard rumors that Ciena might be looking into buying an older, more established company that has a large customer base, is actually profitable, but is really a 1-trick pony (but its one trick is something that Ciena doesn't have).
I won't say what that company is, BUT I would say that it would be very ironic of CIENA bought THEM.
Belzebutt
Belzebutt
12/4/2012 | 10:20:46 PM
re: Ciena Looking to Merge Away Misery
You gave yourself that "5", did't you.
BenGrahamMan
BenGrahamMan
12/4/2012 | 10:20:45 PM
re: Ciena Looking to Merge Away Misery
CIENA Corporation
May 23, 2002
Q2'02 (April 30, 2002)
Conference Call Notes

http://www.ciena.com/news/2002...

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

-+ Revenue contribution from 38 optical networking customers. 4 new customers and 4 greater than 10 % customers. These 4 customers accounted for 60 % of revenue. 2 of the 4 greater than 10 % were international customers
-+ Core switching and metro switching greater than 50 %
-+ Long haul less than 20 % total revenues
-+ Metro K2 greater than 10 of total revenues.
-+ GAAP Net loss of 1.86
-+ Inventory charge of 223,277
-+ CIENA claims that operating losses were not as bad as presented since much of the charges were G«£one time G«£ events. (Just my opinion, but that is a bunch of baloney, especially with the inventory charge, which during the buildup continually increased margins and earnings)
-+ CIENA claims strong balance sheet (G«£strongest in the industry G«£).
-+ Cash burn was 44 million when excluding payoff of Cyras debt
-+ DSO was 63; this is down from last quarter of 87. DSO's should fluctuate and could come above target range (I missed target range)
-+ Inventory levels were 75.6 million. RM = 101.3, WIP 27.6 m, FG 73.1. Turns were 4.6 compared to 2.2 last quarter.
-+ Worldwide headcount 2235, a decrease of 1159 from 1/31/02.


Gary Smith
-+ Long Haul system sales outpaced channel card sales. Indicated to draw no conclusions or trend from that.
-+ G«£Unsustainably low spending levels by customersG«•
-+ Revenue from 5 metro switching customers, up from 2 in Q1'02
-+ CoreDirector gaining market presence. This has been shipped to more than 35 customers worldwide. CoreDirector trials are continuing and progressing very well. These trials will be a meaningful telltale sign of NextGen technology acceptance.
-+ Continues to hear that end user demand is continuing to grow.
-+ Customers can deploy today at a cost of about -+ from over a year ago.
-+ CIENA cannot wait for long haul demand to return. Expects market to look much different in future. CIENA will continue to deliver fully integrated network wide solutions. CAPEX is part of the problem, whereas OPEX needs to be addressed.
-+ Future revenue drivers will be added features of CoreDirector, core switching metro market.
-+ 3 key items moving forward
o Focus sales efforts on incumbent carriers (RBOC's and International) (just won a large incumbent international carrier). Future incumbent wins will be a benchmark for industry in general.
o Broaden product portfolio. Needs successful integration of ONI.
o Expense management and cost management

CFO speaks

-+ Revenues 3rd quarter will be flat to down.
-+ Gross margins to be in 5 to 10 % range
-+ Operating expenses to decrease slightly
-+ Other income 2 to 4 million range
-+ EPS of (.17 to .19)

Question and Answers

-+ What was equipment on G«£ Major International CustomerG«•? Answer is CoreDirector. SDH functionality of MetroDirector should drive greater international adoption. Unnamed vendor has multiple current vendors and hinted towards legacy vendors.
-+ China as a region was greater than 10 % customer.
-+ Not seeing meaningful traction in RBOC's until at least 2003. Seeing competition internationally from Alcatel and Marconi. In USA seeing Lucent as primary competitor.
-+ Paul Silverstein asks if any change seen among competition. CIENA indicated that Lucent has a decent strategy with Lambda Unite and existing ATM, yet seeing lots of interest but not traction.
-+ Cash burn expectations of 140 G«Ű 150 million in current quarter. Going forward normalized cash burn will be same as prior guidance (my thoughts are, what was prior guidance? I looked at my CC notes from February 21, 2002 and that number was 50 to 70 million. Yet the guidance back then was based on greater revenues and greater gross margins. Hence I found that answer to be terribly confusing and vague.
-+ CoreDirector roll out with AT&T going well. CIENA claims that the rollout is greater than halfway through of first phase rollout. Questioner asked if revenue was recognized halfway as well. CIENA would not comment on that. (My opinion is that was a very proper and relevant question and I am concerned as to why CIENA would avoid answering that)
-+ For quarter 3, North American / International revenue picture will be near where it was this quarter. Breakeven numbers will be discussed after ONI deal is closed. (I am not sure of the current breakdown).


You can read more of my CIENA work at my yahoo briefcase

http://briefcase.yahoo.com/rbc...

technology_investor
technology_investor
12/4/2012 | 10:20:45 PM
re: Ciena Looking to Merge Away Misery
Could it be TLABs?

Regards,
zweisel
zweisel
12/4/2012 | 10:20:44 PM
re: Ciena Looking to Merge Away Misery
Burger King?
eyesright
eyesright
12/4/2012 | 10:20:44 PM
re: Ciena Looking to Merge Away Misery
Tellabs has emerging competition in the core wideband market, so I don't know if it would be wise to purchase a company that sells a 15 year old architecture. A number of carriers have real issues with the older widebands in terms of cost per STS, space requirements, and lack of higher speed interfaces.
gea
gea
12/4/2012 | 10:20:43 PM
re: Ciena Looking to Merge Away Misery
"Tellabs has emerging competition in the core wideband market, so I don't know if it would be wise to purchase a company that sells a 15 year old architecture."

Well, I thought so too until it was pointed out that a) Tellabs will have 1.2 Billion in sales this year...Ciena would be in effect buying access to those customers (inlcuding RBOCs);
b) that Titan 5500 (now called the Tellabs 5500) is ubiquitous, and even though the architecture is old, there's not much that can be changed. A W/B-DCS is a pretty simple device, kinda like a wheelbarrow....what's to change?
So If Ciena can integrate their EMS with Tellab's stuff, they would have a complete end-to-end solution. No too bad.
oh yeah,...
c) Tellabs has a lot of cash in the bank and is technically profitable. Might their be some accounting magic that can happen here?

I dunno. I've got a lot of doubt about this rumor too, but it has some merits to it. But the culture clash would be pretty huge, likely resulting in a boatload of Tellabs apparatchiks getting dumped on their asses.
oc-3072
oc-3072
12/4/2012 | 10:20:42 PM
re: Ciena Looking to Merge Away Misery
furio,
i second that.... china was 10% of total revenue, not *international revenue*. also, smith did say metro switches were "greater than 10%," so it wasn't unspecified.
-oc-3072
let-there-be-light
let-there-be-light
12/4/2012 | 10:20:40 PM
re: Ciena Looking to Merge Away Misery
OK,

Now that we have attempted to deflect attention away from the overall dismal picture by nitpicking on a few minor details, can someone who did "listen carefully" please shed some light on this situation??

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