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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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fanfare 12/4/2012 | 11:10:07 PM
re: Ciena Seeks R-E-S-P-E-C-T That was a lucid, well thought out, unbiased post.

I agree completely. What I don't understand is, why does your position on other issues exhibit such a polarized perspective?

sincerely,

ff
corvisalum 12/4/2012 | 11:10:07 PM
re: Ciena Seeks R-E-S-P-E-C-T CIEN does emulate CSCO in a lot of respects. They will not win any large RBOC contracts either.

If CIEN is so hot on RBOCs, how come all we hear from the RBOCs is that the ONI portfolio is dead and CIEN has nothing?

I would watch out for one of the larger players to swoop in on the upcoming RFPs, leaving CIEN in the dust. They have lost direction - distracted by that L2/L3 koolaid (another CSCO lead that they wish to follow), when the big bucks still remain in L0, L1.

Maybe they will get into the services business next! Is this another CORV waiting to happen?

ca
waverunner 12/4/2012 | 11:10:06 PM
re: Ciena Seeks R-E-S-P-E-C-T lilgatsby, are you hopeing your posts will garner up some Ciena momentum, no one believes your crap...

"NT Fires R&D": Ciena is down to three designers on the optical (Corestream/Wavesmith) and one is a technician. Fact.

"NT down to one LH line": Let's see I counted 6 sellable products, all verifiable.

"Wavesmith vs. 5200 at SBC": Hmmm...NT has 99% share of storage over optics, Ciena's WS? If someone could attempt to even position this ugly beast. Dino? Have you even taken the time to compare the two platforms before you spew your FUD?

" It'll get worse...": With what? Akara? This is an ILEC not Big Bank Citi!

"These things happen when one company fires employees...": See my first point.

Wave
lilgatsby 12/4/2012 | 11:10:06 PM
re: Ciena Seeks R-E-S-P-E-C-T fanfare, thank you. I'm guessing you are referring to some of the great corv debates. I don't view my position as polarized...I am simply often the one not willing to go along with the corv investors that proclaim to know the technical and operational ins and outs of the long-haul market because they have a business degree from the Talahassee Jr. College of Business.

lg
lilgatsby 12/4/2012 | 11:10:02 PM
re: Ciena Seeks R-E-S-P-E-C-T waverunner, (1) you are an idiot.

(2) Last time I checked NT was the only company propped up by a Govt support structure and not sales.

(3) WS is not a 5200 comparable product and I never said it was. Again, see #1.

(4) Long-haul looks like 1600G to me. Where are the other five systems, Einstein? I'm not talking entire product line, maybe you should read before posting.

(5) Don't try to talk about headcount, you know nothing and NT has wacked more people than any company in our industry outside of LU.

NT hasn't had many/any stellar press releases lately, sport. Of course Rice Belt Telephone swapping a few Class 5's was pretty big news for NT these days...Maybe they're the ones in need of momentum.

lg
waverunner 12/4/2012 | 11:10:01 PM
re: Ciena Seeks R-E-S-P-E-C-T lilcraptsby,

What color is the crap in your world, red and white? It just keeps on spew'n doesn't it...

The problem with you claims is that they are backed by the same red & white stuff aformentioned. Unfortunately for you, I will be the avenger of your spew...

NT sold 90% of its 10 billion revenue last fiscal in the U.S. and abroad (verfiable financials). Are you calling this Gov't backing? Bonds, equity are held by non-gov't funds, smart enough to keep the tax dollar away from it, all verifiable.

LH products, how do you define an offering? How about this whatever a client can buy from NT for its LH space is a LH product! Clear enough. Mr. Client you can buy the following: 1)HDX 2)LHDT 3) OM6500 4) 1600G 5)LH1600 6) LH4000. All verifiable.

Headcount: your not to weighty rebuttal on my claim, only reinforces Ciena's less than complete LH development team, three guys waiting for projects to get commitment, they might as well have these guys write the M&A press releases, at least they could claim some involvement in those products.

Press releases: does this even require an answer, can you list for me Ciena's achievements of late other than getting punted out of the NSDQ100 or Nick T's downgrade. Chart the stock lately, now chart NT's.

The public good has been restored, you can all sleep well tonight, move along nothing to see here. Until next time I am the avenger of spew, I bid you good night.



zillionaire 12/4/2012 | 11:10:00 PM
re: Ciena Seeks R-E-S-P-E-C-T Ladies, ladies

the tampon machine is in the lavatory...I will lend you both a dime.
solver 12/4/2012 | 11:09:59 PM
re: Ciena Seeks R-E-S-P-E-C-T zillionaire, maybe you should place your dime on who will get the last laugh. We need more spirited debates, as long as it doesn't turn into yahoo board.
solver 12/4/2012 | 11:09:52 PM
re: Ciena Seeks R-E-S-P-E-C-T zillionaire,
Geez, for someone that was promoting peace, you've got a lot of venom spill.
Wait, you are an outsider to the telecom industry and have nothing to do with it? If so, I would advise you to not post any ill-informed opinions here.

It's always interesting to hear 2 different companies debate about their market success, or the lack thereof. I thought the arguments were boastful but informative. If you don't understand it or don't want to see it, go surf somewhere else.

Having the last laugh is the same thing as market competition. A few winners, and whole lot of losers. Doesn't matter what business you are in, it's the brutal reality.

I have a lot of sympathy for those that are out of a job. Heck, I can't count the number of friends that have been impacted. But, when people flooded into the market, you should know there had to be an end to the party. It's unfortunate, but the industry needs consolidation before it can get better.

BTW, that's "laid" not "layed". Maybe you are not familiar with that term. And I have no idea what you are talking about in your last paragraph. Sounds like you are one sick narrow-minded puppy though.
zillionaire 12/4/2012 | 11:09:52 PM
re: Ciena Seeks R-E-S-P-E-C-T solver - thats the problem with all you scumbag telecom guys. Your idea of "last laugh" is rejoicing in others failures. How can there be a last laugh when 10's of thousands of you have been layed off???? I think the last laugh is being had by anyone outside of telecom who reads these posts and thinks "what a bunch of losers".
I'm sure you'll be at the next star trek convention taking a class to learn how to speak Klingon. Take your hand on that dream romantic getaway you've been promising it. Maybe buy some tissues with aloe for a change.
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