Ciena Shows More Revenue, More Loss
On the positive side, Ciena beat revenue expectations, booking revenues of $94.7 million, a 16 percent sequential rise over the fourth-quarter 2004 numbers. Ciena had provided guidance of $87 million to $90 million.
Ciena CEO Gary Smith, speaking in this morning's conference call, attributed the new revenue growth to an "uptick" in its core transport and switching market. During the quarter, Ciena landed French provider Groupe Cegetel, which Ciena officials say was a significant contributor to the new revenue (see Cegetel Selects Ciena Switch).
"We're seeing renewed interest in core switching, and especially mesh networking," says Smith. "We expect to see additional core networking opportunites as a result of IP/MPLS convergence."
But skeptics will point to the fact the Ciena still doesn't appear to have a good handle on costs or gross margins. The company reported a GAAP net loss of $57 million, or $0.10 per share. This was an improvement over a net loss of $76 million, or $0.16 cents per share, in the same period of last year. After excluding one-time charges, Ciena's loss was only $0.05 per share, matching the consensus analysts' estimate provided by Reuters.
Ciena's gross margins fell well short of the expected 29 percent, coming in at 25.6 percent, compared to 29.5 percent in its fiscal fourth-quarter 2004. In addition, Ciena provided profit margin guidance of "flat to down" for the next quarter, which is likely to be a major sticking point with investors.
Smith attributed the lack of gross margin improvement to the low volumes in its CN 1000 access product, as well as a preponderance of chassis shipments in core optical. "We had a couple of large transport customer skew to the deployment of chassis rather than channels," says Smith.
Trading in Ciena shares reflected the mixed message, as Ciena opened up in pre-market trading but shares later gave back those gains as the conference call got under way and the details came forth. Shortly after the market opened, Ciena shares were trading down $0.11 cents at $2.64.
With gross margins stalled and the company still losing money, analysts appeared to focus on whether the company will make more cuts to get to profitability. Several analysts tried to draw out Smith on operating expenses, asking questions about expenses in the Q&A on the conference call. But Smith didn't reveal much.
"We can't save our way to profitability. I think we are rightsized," he said. "There's no clear answer -- we'll continue to look at our operating expenses and balance with the opportunities in the marketplace."
Ciena noted in its quarterly results that it had reduced R&D, sales and marketing, and general and administrative operating expenses by 9.9 percent sequentially. It's also reduced cash burn from $48.7 million in the fiscal fourth quarter of 2004 to $43.3 million in the fiscal first quarter of 2005. It ended the quarter with cash and short- and long-term investments valued at $1.23 billion.
Anlaysts hit Smith with questions about forthcoming M&A activity in the service provider market, especially the combination of SBC Communications Inc. (NYSE: SBC) and AT&T Corp. (NYSE: T). Both are Ciena customers (see SBC/AT&T: Possible Winners & Losers). Smith spun the news positively, saying the consolidation could be a "long-term positive" for the industry and could acutally "boost capex in certain areas."
Looking forward, Smith says the company is still working on building its access business, including its CN-1000 triple-play access platform, which came out of the acquisition of Catena Networks. He says new sales from the CN-1000 were partially responsible for weighing down profit margins, and the product needs to "build volume" in order to contribute to profitability.
Smith also has high hopes for Ciena's new CN 4350 Ethernet switch platform, which was released during the quarter, targeting triple-play services at telcos and cable MSOs.
Ciena broke out revenues derived from acquisitions, saying that these revenues have increased to 37 percent of total revenue. Ciena CFO Joe Chinnici says the next startup revenue could come from its partnership with Turin Networks Inc.: "You should be hearing about revenue from Turin in the upcoming quarters."
Moving foward, Chinnici says Ciena expects to increase revenues 5 to 7 percent sequentially in the second fiscal quarter of 2005, and that gross margins will be flat to down from first-quarter levels. Net losses are expected to come in the range of 5 to 7 cents per share.
— R. Scott Raynovich, US Editor, Light Reading