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Optical/IP

Ciena Shows More Revenue, More Loss

Ciena Corp. (Nasdaq: CIEN) provided enough information in its fiscal first-quarter earnings results to both whet the appetite of the optimists and bulk up the case of the pessimists.

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

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materialgirl 12/5/2012 | 3:25:44 AM
re: Ciena Shows More Revenue, More Loss Sitting on over $1B in cash and losing "only" $40M/Q, these guys have no reason to do anything but maintain the status quo. They can go on for years like this. Where is the Board of Directors? Only a fool would hold these shares rather than demand a big cash dividend and disolution of this mess.
lastmile 12/5/2012 | 3:25:43 AM
re: Ciena Shows More Revenue, More Loss This is what the light reading message board is meant for!
Criticize every management and express your views as though you could have done a better job had you been the CEO.
Something is wrong somewhere. It is the economy.
Can you name another CEO who has made better use of capital in this particular industry?
The trend today is 'status quo'. Just wait it out till something improves.



opticalPassion 12/5/2012 | 3:25:43 AM
re: Ciena Shows More Revenue, More Loss "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."
Balet 12/5/2012 | 3:25:42 AM
re: Ciena Shows More Revenue, More Loss What's Ciena's new superior marketing/BD doing then? Modifying their logo sign? May be it is time to realign, come up with new products or partners... Ciena still has quite a few smart technical guys.
paolo.franzoi 12/5/2012 | 3:25:42 AM
re: Ciena Shows More Revenue, More Loss
Mark Smith - Adtran
Hong Lu - UT Starcomm
Scott Kriens - Juniper
John Chambers - Cisco

How about those for starters as doing a better job at managing capital.

seven
particle_man 12/5/2012 | 3:25:42 AM
re: Ciena Shows More Revenue, More Loss "Only a fool would hold these shares rather than demand a big cash dividend and disolution of this mess."

Except the math doesn't even work for that. Their market cap at $2.50 a share is $1.4B. If you dissolve the company with 570M shares outstanding and split up the cash you only get around $1.75 per share and around a 30% loss.
rocksolid 12/5/2012 | 3:25:42 AM
re: Ciena Shows More Revenue, More Loss Ciena's cash flow statements show that continuing operations burned through $43M of cash.

At 26% gross margins for hardware it means they need to increase quarterly revenues by about $164M per quarter just to break-even on operating cash flow.

That would require them to nearly exactly TRIPLE their hardware revenues just to break-even!

!!!!!!!!

No way is that going to happen anytime soon - so it means they either CUT, CUT, CUT some more which means either sales force or R&D takes a hit. Both of these will then impact revenues, leading to the infamous DEATH SPIRAL.

Or they continue to lose money while they figure out what to do next.

Or they find a replacement for Gary Smith.

My prediction is that they will do ALL OF THE ABOVE.

....sigh......
rocksolid 12/5/2012 | 3:25:41 AM
re: Ciena Shows More Revenue, More Loss "Except the math doesn't even work for that. Their market cap at $2.50 a share is $1.4B. If you dissolve the company with 570M shares outstanding and split up the cash you only get around $1.75 per share and around a 30% loss."

*******

Particle man,

You've just clearly explained why this stock should be shorted!

Ciena's product margins are terrible and they have no chance of tripling their revenues to get to operating break-even, so the reality is that the market is over-valuing them on the delusional expectation of future growth.
opticalPassion 12/5/2012 | 3:25:41 AM
re: Ciena Shows More Revenue, More Loss Someone mentioned that they have $1B, but this was 2 yeras agao, and since then they averagely lose $60million a quarter. So how much cash left now?

BTW if i were the investor, i would close CIEN and use the cash in realestate investiment or mutual funds, i get at least 30% return. What a waste!!
Timmy! 12/5/2012 | 3:25:39 AM
re: Ciena Shows More Revenue, More Loss Their net cash is actually just $640m, they've got $690m of bonds coming due in Feb 2008.
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