Hope Springs From Sprint
Ciena is perhaps most directly affected by Sprint's spending patterns. Sprint and Qwest Communications International Inc. (NYSE: Q) together accounted for 50.5 percent of Ciena's revenues in 2001. Last night, Sprint's earnings call brought both good news and bad (see Sprint Reports Q1 Earnings) -- and that may be why analysts are split about the impact on Ciena.
First, the good news. Sprint's call came as a rare positive surprise in the telecom market. Earnings per share of 33 cents beat analyst estimates by three cents, and revenues were up 8 percent year to year.
Now the bad news: Sprint has reduced its capex (capital spending) forecast for 2002 by $300 million to $2.7 billion. The announcement was made during the quarterly earnings conference call.
But the news also came with some hopeful details. Sprint execs said the company won't shrink its budget any further, and what cuts are made will come largely from projects in the carrier's global markets and long-distance areas. Spending will continue primarily on the circuit-to-packet migration project Sprint started late last year -- one that involves softswitches and Asynchronous Transfer Mode (ATM) kit from Nortel Networks Corp. (NYSE/Toronto: NT).
What's it all mean for Ciena? Analysts give mixed reports. "We believe [Sprint's] cuts will affect Ciena significantly," write analysts Tal Liani and Simon M. Leopold of Merrill Lynch & Co. Inc. in a research note. The analysts point out that the areas where Sprint is cutting are precisely those where Ciena's DWDM gear is employed.
Other analysts aren't so negative. "This data point is not incrementally threatening to Ciena," says Steven Levy of Lehman Brothers. There's good news, he says, in the small size of the cut and in the fact that Sprint has spent just $543 million of its allocated capex budget so far this year. Dividing $2.2 billion among this year's three remaining quarters, Levy says, indicates spending will be higher than it was this quarter. Even if the money doesn't go directly into Ciena's coffers, it's a sign of improvement that can't be ignored.
Other sources have stated for months that Sprint may be starting to fill up its core network, and they hint that capacity may need to be boosted at some point soon. That could have a direct impact on Ciena.
On last night's call, Sprint indicated that it was ready to increase capacity, but not until it sees demand in place. And demand appears to be in question at Sprint. Execs claim usage of private line and dialup IP segments has "softened" as customers increase their reliance on wireless services, instant messaging, and email.
Experts say Sprint is likely to wait until the market demand picks up before spending on new core networks. "In this day of more difficult access to capital, it's unlikely Sprint or any other carrier will build out capacity on an expectation that demand will come," says Cory N. Jackson of U.S. Bancorp Piper Jaffray.
Despite the signs of spring in Sprint's report, there may be more pain for Ciena to endure in the short term. Qwest, its other key customer, may have more capex cuts in store as it battles its own private downturn and SEC investigation (see Qwest Revises, Retraces, Replies). Meanwhile, competition appears to be building for the vendor's mainstay CoreDirector (see Qwest Revises, Retraces, Replies and Cisco Preps Stealth Switch).
Ciena says it has nothing new to report beyond its latest quarterly report back in February, where it acknowledged that reduction in proposed sales to its key customers was the reason for lowering its second-quarter guidance to $100 million (see Ciena Closes Q1 and Ciena: Outlook Dim).
That news shocked Wall Street, considering that Ciena lost money on $162 million in revenues for the three months ended January 31, 2002. Originally, analysts had hoped for guidance of $148 million for the present quarter.
Still, the news that at least one major carrier is hitting bottom and may be at least thinking about its optical core is considered by many to be a positive sign. "It's a difficult environment, but Ciena is among the best positioned in the industry, long term," says Joe Gladue of Chapman Co. "Further cutbacks will delay Ciena's return to profitability, but the company's likely to be in for a large share of wins when carriers resume capex growth."
At press time, Ciena shares were trading at $8.58, up $0.74 (9.44%).— Mary Jander, Senior Editor, Light Reading