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Optical/IP

Ciena Seeks R-E-S-P-E-C-T

Ciena Corp. (Nasdaq: CIEN) has been running plays right out of Cisco Systems Inc.'s (Nasdaq: CSCO) playbook, but that isn't winning it points on Wall Street.

Like Cisco, Ciena has been buying startups, investing in startups, and trying to get into new areas, rather than hack away at its business while leaving large markets behind.

But Wall Street still casts a skeptical eye, as evident in UBS Investment Research's downgrade of Ciena's shares on Friday.

In his note, analyst Nikos Theodosopoulos points out that Ciena has a long and somewhat muddy road to profitability. "We do not expect the company to become profitable until FY06 at the earliest, even if we consider significant revenue upside from potential contract wins," he writes.

Ciena hasn't said when it will break even, but it has tried to show it's got the right strategy.

In fiscal 2001, nearly 80 percent of Ciena's revenues came from long-haul optical transport.

Since March 2001, the company has spent about $1.6 billion to acquire companies in the storage-over-Sonet, multiservice edge switching, Sonet transport, and metro DWDM markets (see Ciena Completes Akara Buy, Ciena, ONI to Merge for $900M, and Ciena to Acquire WaveSmith).

The result? For fiscal 2003, Ciena's revenues from core products only made up about 41 percent of its total sales. Meanwhile, its metro networking revenues made up 36 percent of sales.

The company's gross margins, however, have been an up-and-down story. Gross margins are a tough thing to predict in telecom equipment anyway. The sale of an initial chassis likely won't command the same margins as the cards and components that plug into the chassis later.

But in Ciena's case, some chunk of the company's anticipated revenues in 2004 will come from its margin-depressed long-haul business. Ciena has said it would take margins in the range of 40 percent to help it get to profitability. For the past three quarters, Ciena's margins have been in the high 20 percent to 30 percent range.

Ciena hasn't been shy about charging toward gear that delivers Ethernet and other data services. "The optical market itself... is basically flat," says Ciena spokesman Denny Bilter. "It's not growing."

Contrast that with Cisco, which intends to make the optical market a billion dollar business at some point (see Cisco's Billion Dollar Plays ).

Some have said Ciena's name is missing from some upcoming metro DWDM RFPs from SBC Communications Inc. (NYSE: SBC) and Verizon Communications Inc. (NYSE: VZ), suggesting the vendor is losing its edge in the optical business at the expense of the new markets it's chasing. Ciena won't discuss specific RFPs, but denies the rumor's premise. "Our foot is not off the accelerator in the metro DWDM space," Bilter says.

So where does this leave Ciena on Wall Street? Perhaps it is seen as one of those companies that will lose a few races, but finish – and perhaps place highly -- in the marathon.

Ciena shares have lost about 11 percent of their value in the past three months. And last week it announced improved revenues, but it still missed analysts' predictions Ciena Dampens Outlook Hopes).

"While we agree with Ciena’s strategy, we don’t necessarily see Ciena’s stock as a compelling investment," writes Sam Wilson, an analyst at JMP Securities, in a research note on Friday.

— Phil Harvey, Senior Editor, Light Reading

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erbiumfiber 12/4/2012 | 11:08:44 PM
re: Ciena Seeks R-E-S-P-E-C-T Solar Sailor wrote:
>>Ask around at Ciena what &#8220;IP&#8221; stands for, you&#8217;re more likely to get an answer of &#8220;Intellectual Property&#8221;.<<

Yup, because I never saw a company that seems to enjoy patent litigation as much as Ciena(and all the millions of dollars that go down the drain with it...). Look at some of the legal costs associated with recent litigations (the Nortel settlement, for example, in the ONI litigation) and you'll see that it's not helping the bottom line...


lietreading 12/4/2012 | 11:08:49 PM
re: Ciena Seeks R-E-S-P-E-C-T Ciena will succeed because:

1. The CFO used to manufacture Bras.
2. They employ only yes men at the top
3. They employ a lot of yes men at the top.
4. Nothing happens without hours of
discussion between legal and the customer.
5. Nothing happens without hours of
discussion with legal.
6. Nothing happens without approval from one man
in Sales operations.
7. They would rather make the legal department happy instead of the customer.
8.They have $1Billion in the bank.
9. They can't see the difference between the needs of the Interexchange carriers, and the
RBOCs.
10. Upper management is the investor behind the VCs in the companies they keep buying.(In other words they recoup their money in the failing startup by buying the company with Ciena money)
11. They would rather see that upper management gets their stock options at the same time they
withold stock option from the employee purchase plan.
12.Mr.Smith wants to be knighted in England his
home country.(and everyone thinks the problem is
jobs going to India!)
10.There are movements afoot on the above subject
through an old ONI relationship at BT.
11. They will eventually take the company private
and skim off the money because of, and in order to make these things possible.
SUCCESS!
zillionaire 12/4/2012 | 11:08:51 PM
re: Ciena Seeks R-E-S-P-E-C-T Cyber Techy:

The Wavesmith folks are good people. That being said, who knows how long it will be before Ciena says "we can do it better" and pulls the plug. Keeping the people in Linthicum busy is priority number one - even at the expense of those who created the products that keep ciena afloat today.
ATMRules 12/4/2012 | 11:08:52 PM
re: Ciena Seeks R-E-S-P-E-C-T Well, I guess your current job is not eligible for transfer to India? If not then brilliant decision....Merry Xmas!!!!!!!!!!
ATMRules 12/4/2012 | 11:08:52 PM
re: Ciena Seeks R-E-S-P-E-C-T Equipe = Economics 101 - No Customers = No Revenue = no more investment $$$ = Another RT 495 boatanchor...IronBridge Networks, Ennovate, Crescent Networks, Gotham Networks, Celox Networks, Cratos Networks,Tenor Networks ...you get the picture....after all 9 out of 10 startups in any business usually fail....
zillionaire 12/4/2012 | 11:08:53 PM
re: Ciena Seeks R-E-S-P-E-C-T they may go that long with the skeleton crew they have left. They have little chance of landing any orders.
cyber_techy 12/4/2012 | 11:08:53 PM
re: Ciena Seeks R-E-S-P-E-C-T I was contacted by a recruiter regarding a Wavesmith Ciena job and didn't bother to go for an interview. after reading the comments, it seems to be the right decision (not that they would have hired me anyway).

The rationale was that even if the product does good, as soon as it's a GA quality, it will be sent to India to rot in Bangalore. So why risk my current job.
ATMRules 12/4/2012 | 11:08:57 PM
re: Ciena Seeks R-E-S-P-E-C-T Yep, Equipe is still around, rumor on the street is they have enough payroll left until Memorial Day....
big_deahl 12/4/2012 | 11:08:57 PM
re: Ciena Seeks R-E-S-P-E-C-T SolarSailor:

Good summary. One more to add to your list - the Equiipe investment. Are they still around?

SolarSailor 12/4/2012 | 11:09:08 PM
re: Ciena Seeks R-E-S-P-E-C-T Ok, so lets get specific then shall we, lets start with easy problems, the ProductsG«™

o The Lightera acquisition G«Ű sure, they had some early success with the Core Director. But look at where they are now, they completely squandered their lead. The issue of course is that they had no clue (and no vision) to go after the RBOC/PTT space from the beginning. Sure the Core Director now has some field proven signaling and routing capability, but in the optical core, is this really a necessity? Which service provider in their right mind is going to pay a 50%-100% premium over a traditional solution for a G«£luxuryG«• product?

What about AT&T you say, well do you know if they actually made any money selling to AT&T?

What about opex you say? Opex is an issue people talk about during the bad times, Service providers are always more interested in improving their topline, not focusing on their bottomline.

For years Ciena messed around with useless incremental features on the Core Director, today they donG«÷t even have Ethernet on that box! What topline?!

o The Cyras acquisition G«Ű what a joke. Everyone on Wall Street knows the story, Smith & folks got taken for a ride big time (I suspect Ciena has since learned the phrase G«£due diligenceG«•).

Industry leading product on a paper at the time, but one that was acquired at least 2 years before being ready for real deployment, and with an early 1990s cost and price points! i.e. un-sellable.

What surprised me more is that not one person at Ciena who made that decision was castrated for the blunder. Instead, they took it out on the poor Cyras people, even the very few bringing in revenue for crying out loud! G«ˇNuff said.

o The ONI acquisition G«Ű lets face it, it was 18-24 months too late. When they acquired ONI, the Metro DWDM market had already started to take a nose dive. Their own Metro platform was extremely long-in-the-tooth, their next-gen stuff was Years away, buying ONI was the only way to stay in a market they were supposed to be leaders in, so, the ONI acquisition made sense from a technical standpoint, not necessarily from a commercial one G«Ű end result, theyG«÷re left holding-the-bag with an expensive portfolio and only 1 selling product which they have to sell a truck load of before they can make any money.

o The WaveSmith acquisition G«Ű everyone knows that acquisition had more to do with SBC prodding them then any vision on CienaG«÷s part. Until that point in time, Ciena had no clue how much money was being spent by Service Providers in the data space. With the WaveSmith acquisition suddenly came G«£the visionG«• to venture into layers 2/3 and above, never mind theyG«÷re a decade late coming to the party.

o The Luminous investment G«Ű I still canG«÷t stop laughing at this one. Looks to me like Ciena likes being taken for a ride (ok, so maybe they Still donG«÷t know what G«£due diligenceG«• means).

o The Laurel investment G«Ű For a change something a little smarter. Obviously driven by the one or two bright individuals left in the company who knows something about layers 2, 3 and above (you-know-who-you-are).

However, Ciena doesnG«÷t have the resources nor anyone that knows how to sell this thing, not the CTOG«÷s team, definitely not the Marketing team, and most certainly not Sales, and its not a skill set you can pick-up overnight.

Ask around at Ciena what G«£IPG«• stands for, youG«÷re more likely to get an answer of G«£Intellectual PropertyG«•.


And I havenG«÷t even started on the People problems. looks like someone beat me to naming namesG«™
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