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Ciena Sales Up, Outlook Cloudy

Light Reading
News Analysis
Light Reading
5/22/2003

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

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Belzebutt
Belzebutt
12/5/2012 | 12:01:24 AM
re: Ciena Sales Up, Outlook Cloudy
"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 CEO Gary Smith on a conference call with analysts. The continued spending drought is calling for Ciena to revamp its market approach.


So now the tune changes from "unlike our competitors we haven't made cuts in R&D and we'll be better positioned for the upturn" to "there will be no upturn so we better make some cuts". Come on Gary layoffs are so 2002. Looks like the dinosaurs were right all along.
zettabit
zettabit
12/5/2012 | 12:01:21 AM
re: Ciena Sales Up, Outlook Cloudy
How does Ciena get back to revenue growth. The leading candidate is renewed spending within existing customers:

- Sprint: been looking at an ULH for a while, and Ciena is a candidate, but far from the front-runner. Expect strong competition from...EVERYBODY.... and no way that Ciena will be able to maintain its historically very high margins from Sprint.

- Qwest: has enough excess capacity already deployed to last it through to 2005 and beyond. Will not be buying again for at least 24 months.

- WCom: Ciena never sold into MCI, but into Wiltel which became Worldcom. They were then effectively capped out after the merger with MCI, and NOWHERE in MCI's future photonic network plans.

XO, Wiltel, etc...: All these customers are recovering post-Chapeter 11, and though they may add channels and exhaust a few routes, they will NOT spend anywhere near their 1998-2000 levels.

- RBOCS: Don't buy long-haul WDM, and very little Metro WDM, and probably not a lotta Wavesmith either.

- PTTs: BT was a big win. That's it. And BT will only be CoreDirector deployments in the near-term. Assume a WILDLY OPTIMISTIC deployment of 50 CoreDirectors at a HIGHLY OPTIMISTIC price of $1 million each, and .... you do the math.

- ebone, KPNQwest, Interoute, TD, etc...: The European carrier market is VERY, VERY, VERY slow, with many bankruptcies and tentative steps to recovery. Again, there will be no major new build-outs for several years to come.

CoreDirector sales: Ciena's ALREADY won the business at AT&T, Sprint, Qwest, Level(3) and Wiltel. So new revenues will be channel adds, until the initial switches exhaust their capacity (say in 2005 and beyond). Until then......

In conclusion, Ciena can expect some level of run-rate business from its existing customers, GROWTH will need to come from elsewhere.......

Asia - "Ciena who?"

Europe PTT's: "C'est qui Ciena?", "Was ist Ciena?"

Oooopps! Houston, we have a problem!
solver
solver
12/5/2012 | 12:01:18 AM
re: Ciena Sales Up, Outlook Cloudy
Zettabit, you maybe overly pessimistic about Ciena.

I have these questions and comment to anyone with the info,
1. customer and purchase mix:
a) I seem to recall Ciena/ONI sales to at least 1 or 2 major RBOCs, was it SBC for metro boxes
b) Regarding AT&T LH DWDM project, a long anticipated, but infinitely protracted bid where Ciena is the frontrunner, when does this gets awarded?
c) Exactly what has Ciena shipped to Telmex? I know C/D is the possibility, but what's the revenue?
2. You can say that the future is not so bright for Ciena, but I would submit that Ciena has been steadily winning large incumbent carriers in the world. The win at AT&T and BT are breakthroughs no matter how you look at it. They are quietly cultivating the China market from behind the scenes and may get something through the backdoor.

They have spent the money in the last 2 years to be a strong contender for every major bid in the western hemisphere, and they are the favored vendor for the OXC part of the DISA bid.
Ciena still has $1.7 billion, which can go a long way toward making them competitive in optical and other market they choose to enter.
There maybe a light at the end of the tunnel after the current quarter.
We'll have to see.
puddnhead_wilson
puddnhead_wilson
12/5/2012 | 12:01:15 AM
re: Ciena Sales Up, Outlook Cloudy
I respect your opinin but I think you may be too pessimistic. It seems to me that you could construct the same arguement for any optical equipment manufacturer and their customers. Maybe you think that is appropriate. But still why then single Ciena out? Hey, at least they have GROWN revenues the last 2-3 quarters, who else has done that? Is one quarter of projected flat-to-down-10% revenue really the end up the world, when this latest quarter the revenues were up 50% from 9 months ago?

And don't forget, they have beat their estimates the last few quarters, they have historically been "conservative" in their projections, the four quarters summer 2001 - summer 2002 excepted.

If anyone is going to do well in this space it has to be Ciena, they are still up there jockeying for (re)starting position while the other horses are wandering away from the gate in dejection, if the strating gun ever does fire they won't be ready. And ironically, if the gun doesn't fire for many years, and the company does bleed away slowly, they may STILL do better than many of the other horses, even if business does not pick up from here they can keep absorbing cash burn until 2008 at least ...

How do they get back to revenue growth? The answer is no more clear to me than to you or, I suspect, even Ciena managment. But my point is, when the answer does become clear it won't matter unless they are positioned to do what it takes.
zettabit
zettabit
12/5/2012 | 12:01:15 AM
re: Ciena Sales Up, Outlook Cloudy
Solver, your comments are valid, but here are some explanations:

a) I seem to recall Ciena/ONI sales to at least 1 or 2 major RBOCs, was it SBC for metro boxes

The TOTAL global Metro WDM market is slightly less than $500M per year, with Nortel having #1 market share of about 30%, and Ciena (ONI) and ADVA more or less tied at 15% share. So although Ciena has a great market position in this space, it pales in comparison to the SONET/SDH market size which is ten times this amount. In the latter Ciena has the K2 (Cyras) as a product, but essentially 0% share as that product has not been accepted and deployed in volume by any major customer.

b) Regarding AT&T LH DWDM project, a long anticipated, but infinitely protracted bid where Ciena is the frontrunner, when does this gets awarded?

Can you clarify why Ciena is the front-runner for this project? There are reports that this projects no longer even exists. Ciena won over 100 nodes within AT&T for CoreDirector, but that business is now done, and the only going forward revenues will be additions of switch ports, and a few new CoreDirectors here and there. Not much revenues.

c) Exactly what has Ciena shipped to Telmex? I know C/D is the possibility, but what's the revenue?

Ciena shipped CoreDirectors. Probably about 10-15 nodes for Telmex entire network. At $1 million per node.....

2. You can say that the future is not so bright for Ciena, but I would submit that Ciena has been steadily winning large incumbent carriers in the world. The win at AT&T and BT are breakthroughs no matter how you look at it. They are quietly cultivating the China market from behind the scenes and may get something through the backdoor.

AT&T was won in 2000-2001. BT has just been won. The big Telefonica OXC project is on indefinite hold. They have not yet won any RBOC or any other PTT with CoreDirector. The glass half empty says it will be a tough fight to win any new incumbent away from Alcatel, Lucent and Nortel.

Ask yourself how Ciena wins France Telecom away from Alcatel or Telecom Italia away from Marconi, and you'll start seeing how difficult that will be.

The glass half full view of life says there is room for growth. Ciena's problem is that investors are valuing the glass as being 100% full, and Gary Smith knows that the water company has recently turned off his service.

I guess he can always pee into the glass and pass it off for water. Until the market wises up....
solver
solver
12/5/2012 | 12:01:10 AM
re: Ciena Sales Up, Outlook Cloudy
For AT&T Long haul RFP, in comparison to Corvis and Lucent, Ciena was a close frontrunner mainly due to its pricing and ability to hit the LH A/D sweetspot that was vacant after NEC left AT&T. As far as revenue is concerned, well, I'm not sure if the sadist at AT&T even knows the answer.

As for Metro WDM, it's a relative growth field, albeit from a small base. And we are paid to be forward lookers right?

The overall Telmex optical opportunity (not necessarily Ciena's past revenue) is multiple times larger than $10M. As with AT&T, it comes down to timing of deployment.

Of course uncle sam has several hundred million dollars that should get split between a few American companies, which will really help.

As for the valuation of stock, you should know the net cash of ciena is greater than 1/2 of its market cap. Even at the present rate of burn, the company will still have ~1.4billion by the end of 04.

The key question other than revenue is the cost structure. I was hoping to hear better cost cuting plans, which were not clearly converyed.
zettabit
zettabit
12/5/2012 | 12:01:07 AM
re: Ciena Sales Up, Outlook Cloudy
Does Ciena have any (real) business in Asia?

One of their very early customers was KDDI in Japan. However there have never been any press releases of other customers in that region, and Nortel, Lucent, and Huawei seem to be eating up the China market by themselves.

What about Ciena at NTT? South Korea? India? Australia?

Would welcome any views on this, especially from locals in that market or from inside CIEN.
SolarSailor
SolarSailor
12/5/2012 | 12:01:05 AM
re: Ciena Sales Up, Outlook Cloudy
> However there have never been any press releases
> of other customers in that region

This is one of Ciena's biggest problems, they don't seem to like announcing customer wins for some reason!

Last earning call they mentioned winning 9 NEW customers. This earning call they mentioned winning 7 NEW customers.

Keeping in mind Ciena's target customer segment, it would imply those 16 new customers are almost all Service Providers! And if they were North American, most of us would know who they are.

So, who the F* are they??

My guess is Ciena is making greater inroads globally than they let on.
single mode figure
single mode figure
12/5/2012 | 12:01:04 AM
re: Ciena Sales Up, Outlook Cloudy
The Cienasiation has a long way, NTT has a foothold as does KDDI...
Persevero
Persevero
12/5/2012 | 12:01:03 AM
re: Ciena Sales Up, Outlook Cloudy
I think this is common in companies. Wasnt Jedai looking at cheap labor in India for doing their core software? We heard that our EMS was being done there but we ran out of money. Now since Jedai cut back and only got $6M left and still no customers that they are now looking in India again?

Is this now how business does it now, going to other countries for doing their software because it is cheap even if it is poor quality?
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