x
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

<<   <   Page 2 / 5   >   >>
SolarSailor 12/4/2012 | 11:09:09 PM
re: Ciena Seeks R-E-S-P-E-C-T > I've been hearing SolarSailor's argument a lot
> the last year or two, particularly from people
> ()or people with connections to people) at
> lower echelons of Ciena

Its not only the lower echelons. Most of the executives are aware of the problems.

As an example, one big issue is that no one dares to deliver any bad news to G.Smith - hes built an atmosphere of perpetuating only good news within the company, as opposed to whats real, and lots of internal spin-doctoring, mostly from marketing.

The result is people jockeying for position trying to take credit for any piece of good news they can then deliver to Smith.

Look at the business operations group, touting themselves as deal closers - I donGÇÖt know of any company other than Ciena where the sales guy gets less respect than the business operations guy.

Go on, tell me I'm wrong.


> I dond't know what to believe. All I can point
> out is that, many of the things you complain
> about them doing (killing K2, cutting R&D)
> are things that Wall Street is claiming they
> did not do quickly/far enough!

Yes, but they got into the mess by themselves in the first place.

> And claiming the product cycle of Wavesmith
> was supposedly too long, as a poor reflection
> on Ciena, is pretty disengenuous, don't you
> think?

YouGÇÖre completely overlooking the main point.

The product is 2 years too late to the game, and yet Ciena decided to go out and buy them. Its not a bad product, IGÇÖm sure its good at what it does, but the market has moved on, and they figured out too late. Why else do you think Ciena needed to invest in Laurel barely six months after buying WS? Obviously it was an opportunistic acquisition, but I fully expect the ROI on this acquistion to start looking like ONI before long.

> Ciena is hardly the first tech company whose
> engineers have surmised that the suits are
> f-ing everythign up!

What San Jose engineers? Do you know something you wanna tell us?
zillionaire 12/4/2012 | 11:09:09 PM
re: Ciena Seeks R-E-S-P-E-C-T that plant manager must have his pilots license - I think that gets put into the yearly goals of all directly reporting to that VP.
opsguy 12/4/2012 | 11:09:12 PM
re: Ciena Seeks R-E-S-P-E-C-T LOL! Well I admit that, yes, there are still areas like that but not half as much as there use to be.

On the subject of Plant Managers, I really had to laugh out aloud, I only know one so I can't speak of others, and he is REALLY incompetant. The only reason he is not gone is thats he's close to his vp boss, in more ways than one.

Again, my problem isn't with any particular group or person. When compared to others, Ciena just doesn't get it! I don't know why Executive Management doesn't know this and if they do why they won't do something about it. I can tell you this, ANY ONE of the SVP's, Dir's and Mgrs can spin their need for the staff they have and nobody in executive mgmt can challenge because they REALLY don't know how things get done. They aren't stupid, they just don't know.


zillionaire 12/4/2012 | 11:09:12 PM
re: Ciena Seeks R-E-S-P-E-C-T opsguy:

what do you mean
"there was a time when CIEN even had Directors reporting to Senior Directors and Senior managers reporting to them and so forth"?

That is not past tense - it is the way they operate TODAY. Don't even bring up the "Plant Managers"... thats a whole other can of worms
corvisalum 12/4/2012 | 11:09:13 PM
re: Ciena Seeks R-E-S-P-E-C-T opsguy

you say they have too many people. how about too many senior vice presidents - look at this partial list (grouped to make a point):

strategy & business development:
steve chaddick svp& chief strategy officer
james collier svp, corporate development
elizabeth perry svp, business development
thomas mock svp, strategic planning

question: who does what? what does the cso do if not strategic planning? oh, that's the job of the svp strategic planning (the cso is an officer, he can't possibly plan or be engaged in corporate or business development!) :-)

and, if i may be so bold, what is the difference between corporate development and business development? hmm, one looks corporate, while the other wears business suits? i am lost. :-o

now for a quick look at p&l:
edward ogonek svp & gm, metro/enterprise
robert o'neil svp & gm, data networking
pamela adams svp core networking
dawn hogh svp, product line management

now for some analysis: the gm is obviously responsible for p&l, right? why is one of the svp's not a gm? oh, wait, I see - there is an svp for product line management, who must be responsible for p&l. But, no, that can't be true, given that we have two gm's handling their own p&l. darn, i am confused again :-(

well, i just hope the insiders (especially the ceo & board of directors) know exactly who is responsible for what since if, God forbid, something goes wrong, we do want to know where to point the fingers!

enough sarcasm before the holidays - enjoy your time with your families

ca
opsguy 12/4/2012 | 11:09:13 PM
re: Ciena Seeks R-E-S-P-E-C-T corvisalum

I won't quibble with what you have to say, all are good points. I think maybe I wasn't very clear about what I was trying to say, which is; I think (not feel) Ciena needs to get MUCH leaner in ALL areas and all ranks compared to other companies in its market-type space, in this instance telecom. I mean, the comparison to Juniper should have been enough to convince ANYONE with half a brain (I can tell you a few SVP's on your list might qualify. Bad joke, I know)that there is an issue here. I mean, didn't some analyst from Morgan Stanley just come out and say they need to cut more?!

I only pointed out 3 groups because they really are the "execution groups", all the others are support functions.

One other thing that might get your hair up, there was a time when CIEN even had Directors reporting to Senior Directors and Senior managers reporting to them and so forth. It is just unbelievable!

Anyway, hope I've clarified myself and that you and others have a Merry Christmas and a Happy New Year. Sorry, I don't do that whole "Holidays" thing...

OG
puddnhead_wilson 12/4/2012 | 11:09:15 PM
re: Ciena Seeks R-E-S-P-E-C-T I've been hearing SolarSailor's argument a lot the last year or two, particularly from people ()or people with connections to people) at lower echelons of Ciena.

I dond't know what to believe. All I can point out is that, many of the things you complain about them doing (killing K2, cutting R&D) are things that Wall Street is claiming they did not do quickly/far enough! And claiming the product cycle of Wavesmith was supposedly too long, as a poor reflection on Ciena, is pretty disengenuous, don't you think?

Finally, while I value their opinions & insight greatly, I think one has to take the insights of engineers in San Jose (e.g.) into the motives and performance of mgmt and sales in Linthicum with a very large grain of salt. Ciena is hardly the first tech company whose engineers have surmised that the suits are f-ing everythign up! This view invariably gains credence when the chips are down ...
opsguy 12/4/2012 | 11:09:20 PM
re: Ciena Seeks R-E-S-P-E-C-T I agreed with you on everything until you got to the understaffing issues.
If by chance you are saying that, for instance, the sales staff is understaffed then this would indicate to me two possible issues: 1.) Too many customers, and not enough Sales support. A highly unlikely issue at best given the current state of revenue and industry-wide lay-offs or 2.) Sheer incompetance on the executive staff. Anyone who has worked at a public company know the Sales staff is treated VERY well because they bring home the money, so I think neither is the case here, although some can make a case for Executive incompetance in other areas of Ciena.

Next is Engineering. Ciena is not understaffed in Engineering, period. 300+ just on the West Coast alone and not much "new" product coming out recently.

Operations. This is where you might say that execution might be the problem, but I'm only guessing. Ciena's habit is to acquire a company and almost immediately RIF 75% of the ops department. This is before they have had the chance to really even learn about the product. With Ciena's big acquisition products, Core, ONLINE and K2 just about everything was fully out-sourced, including assembly, test, QA and purchasing prior to acquisition. This was REALLY foreign to some groups in Ciena and they fight like cats and dogs to do things in-house in Linthicum so they can justify they're payrolls. For instance, to this day they won't let any CM's take on the responsibility of buying high cost optics even though they're commodities. Why?

Last point. If Ciena is making 70+ million with 1800+ employees then why were some of they're acquisitions making 60+ million with just 800+ or better still Juniper, which makes 1000's of boxes a year have only 1500+ employees with quarterly revs almost double that of Ciena? It's not because they build the boxes in-house.

I guess my main point is, its not entirely execution thats effecting the bottom line, rather a major portion, in my belief is excess manpower at all levels, among other things. JMHO

Sorry this was so long.
justenuff 12/4/2012 | 11:09:30 PM
re: Ciena Seeks R-E-S-P-E-C-T SolarSailor,
You definitely hit on some good points. However, I can also add to some of your comments. But, let's try a different perspective on one product you mention: ONLINE2500 (aka, ONLINE Edge)

This box is being sold, however, its EF&I and support costs eat up the little margin there is in the product. The original idea for this box was dead on. However, too many features were crammed into this box too quickly. What you have is a very touchy system that should be realtively easy to set up. When CIENA sends one person out to install or upgrade a unit, the margins are gone. Also, CIENA would have to sell thousands of these boxes to make a dent into their total revenue dollars. The sad thing for the people left at CIENA is that management continues to feed them "balloney" in that the ONLINE 2500 will be a big winner for them in the future. CIENA continued ONI's trend of including premium features into a system and then the sales are left banging on product management because the price is too high and customers are not looking for premium features.

There are some good people left there, but unfortunately, management is continuing to pile work on all understaffed departments. If the CEO can step down from his ivory tower, then he could maybe build the business with the resources they have left.

In short (I know, this is a long message), CIENA's fundamental problem is execution. Their strategy to include more and more products will fail because they do not have the infrastructure to exectute.

for what it is worth,
JE
corvisalum 12/4/2012 | 11:09:34 PM
re: Ciena Seeks R-E-S-P-E-C-T Solar Sailor and erbiumfiber:

You guys are on the money - to summarize (with my 2 cents added):

1) L0 and L1 is where their expertise lies.
2) Old diehards still control the decision making in the company.
3) Old diehards dont know jack about L1,L2.
4) L0/L1 can make them money - they have lost their focus.
5) ONI portfolio (except 2500) is dead.

ca
<<   <   Page 2 / 5   >   >>
HOME
Sign In
SEARCH
CLOSE
MORE
CLOSE