Ciena Rings Up an Upgrade
Ehud A. Gelblum, the analyst who authored the report, cited new visibility into the company’s topline growth over the next two to four quarters as his reason for raising the rating.
Specifically, he says that, after checking with British Telecommunications plc (BT) (NYSE: BTY; London: BTA), he believes the carrier will likely be a larger long-term customer than originally anticipated (see Ciena's BT Coup: How Big?). He says the BT deal, once believed to be worth $60 million, could be 50 percent to 100 percent larger than first thought.
New revenue from WaveSmith Networks, an ATM multiservice switch startup Ciena acquired recently, is also expected to give the company a boost over the long term, according to Gelblum’s note (see Ciena Nabs WaveSmith). He believes the Ciena subsidiary is close to a deal with Verizon Communications Inc. (NYSE: VZ) that will be very similar to the $50 million to $55 million deal it already has with SBC Communications Inc. (NYSE: SBC) (see WaveSmith Wins at SBC).
Ciena is also supposedly getting increased revenues from existing customers. Gelblum says his checks indicate that Teléfonos de México is in the process of ordering additional CoreDirectors for its country-wide network (see Ciena's Optical Switch Fiesta). The new order is expected to be between $6 million and $7 million. But it likely won’t be on the books until the fourth quarter. Telmex has been deploying Ciena’s optical switching platforms, but it is now believed to also be evaluating Ciena’s long-haul DWDM products.
AT&T Corp. (NYSE: T) is also expected to be ordering more as it builds out its metro network. Gelblum estimates the additional sales could be worth tens of millions of dollars.
Not all analysts are so optimistic, however. Stephen Levy, an analyst covering the company for Lehman Brothers, says that there is no justification for raising Ciena’s rating, basing his view on the company’s current revenue and its break-even mark of $175 million to $200 million per quarter. In the second quarter, the company reported revenues of $73.5 million see Ciena Sales Up, Outlook Cloudy. Levy continues to rate the stock Underperform.
"Ciena is getting back some revenue momentum," he says. “The problem is they need seven or eight BTs, and they need WaveSmith to be really big and to get more than an additional $5 to $10 million from Telmex and AT&T.”
In his note, Gelblum admits that Ciena still has a long road ahead of it, but he is optimistic about the stock with respect to competitors like Lucent Technologies Inc. (NYSE: LU), Nortel Networks Corp. (NYSE/Toronto: NT), and Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA).
In midday trading today (June 24), Nortel was trading flat at $2.82 a share. Lucent was down $0.05 (2.59%) to $1.88. And Tellabs was down $0.16 (2.27%) to $6.90.
— Marguerite Reardon, Senior Editor, Light Reading