Ciena Sales Up, Outlook Cloudy
Ciena Corp. (Nasdaq: CIEN) slightly exceeded its own guidance and analysts' expectations in its second-quarter earnings report today (see Ciena Announces Q2 Results). But execs said market conditions remain poor, calling for a long-term overhaul of the company's strategy.
"We don't see much uptick in the near term," said CEO Gary Smith in an interview with Light Reading today. And he's reluctant to comment on longer-term prospects: "Given the two years we've been through, it's difficult to be objective and accurate on that... the financial pages are filled with guys who called the bottom!"
Ciena sales totaled $73.5 million for the quarter -- a 4 percent increase over last quarter's sales (see Ciena Reports Q1). Net loss for the quarter was $0.10 per share, adjusted in accordance with Generally Accepted Accounting Principles (GAAP). Gross margin rose to 24.8 percent, thanks to a better product mix and lower costs, execs said.
But this moderately encouraging news was followed by word of how Ciena continues to prepare for a future that shows no sign of improved carrier spending. Ciena continues to cuts costs in a range of areas. Headcount was reduced by 56 people this quarter and now stands at 2,005. The company now performs only 15 percent of its own manufacturing, down from 100 percent two years ago. It's also streamlined R&D to focus on hardware, software, and network management instead of on individual products. And a new "Lightworks Services" initiative is aimed at marketing Ciena products as solutions involving services and management software as well as boxes (see Ciena Launches LightWorks Services ).
Ciena's cash and investments at the end of the quarter represent $1.8 billion. Resolution of a patent dispute with Corvis Corp. (Nasdaq: CORV) helped keep costs down a bit, execs said (see Corvis Having a Rough Week).
Management's guidance for next quarter is extremely broad -- between $65 million and $75 million, about $1 million or $2 million of which will come from sales of gear from Ciena's purchase of WaveSmith Networks Inc., expected to close early this summer (see Ciena Nabs WaveSmith).
CEO Smith says other acquisitions may occur as and when Ciena sees a chance to improve its presence in segments "adjacent to our space." That space is the "edge of the core," where Ciena is intent on taking market share with Layer 2 switches that feature Sonet STS and ATM interoperability for use in MPLS core networks.
"The core we will leave to our friends Cisco and Juniper," said Steve Chaddick, senior vice president and chief strategy officer, on this morning's call.
Execs say several variables are making the outlook unpredictable; sales could even be lower than this quarter. Revenues from new contracts are likely to be lumpy, and it's clear carriers aren't loosening the purse strings. While Ciena's predicting a stronger fourth quarter 2003, it's not clear there'll be significant improvement in customer spending even then.
"One thing we are not counting on is a rebound in carrier spending... Everyone has their hands on the capex lever with white knuckles," said Smith on a conference call with analysts. The continued spending drought is calling for Ciena to revamp its market approach.
Investors in Ciena apparently have their own share of white knuckles. Ciena's stock was down nearly 10 percent in trading this morning, as it fell $0.51 to $4.87.
Meanwhile, all eyes will be on the potential for new customers. Ciena's targeting an increased diversity in its customer base, including enterprises and smaller carriers as well as incumbents, such as British Telecommunications plc (BT) (NYSE: BTY; London: BTA), with which Ciena scored a major win recently (see Ciena's BT Coup: How Big?).
Smith says that despite the move to a greater diversity of customers, Ciena's still aiming big. "Our predominant focus is on getting into large incumbent carriers," he says. The international market is a particular concern, where recent business hasn't picked up as well as in North America, despite the BT win.
Ciena's quarterly product sales reflect the changing market, which execs see as favoring metro contracts. While the CoreDirector continues to represent more than 25 percent of sales, the MetroDirector K2 and Online products represented more than 40 percent of Ciena's quarterly revenues, a sizeable change from last quarter. What's more, execs say they're seeing pricing pressure in the metro, indicating more spending there.
Analysts were curious about Ciena's plans and customer prospects, particularly given the BT contract and the chance of possible defense contracts for a number of networking businesses. None of the questioning led execs off their stolid focus on grinding away at costs while widening their prospects.
"We continue to remain cautious on CIEN shares," wrote analyst Steve Levy of Lehman Brothers in a note this morning. "Sales visibility remains highly unclear."
— Mary Jander, Senior Editor, Light Reading