Lehman Looks for Ciena Slowdown

Ciena Corp. (Nasdaq: CIEN) may reduce its revenue estimates soon, according to a research bulletin issued this morning by Lehman Brothers analyst Steve Levy. The DWDM equipment maker said Monday that it would cut 10 percent of its workforce, but it then gave revenue guidance for its fourth fiscal quarter that was higher than many analysts had expected.

In a note to clients Tuesday, Levy writes that Ciena's announcement didn't hint that the company was lowering its production levels and may not have given enough heed to capital spending cuts by North American service providers. "Ciena's two most significant customers in recent quarters, Sprint Corp. (NYSE: FON) and Qwest Communications International Corp. (NYSE: Q), recently stated overall capital spending could fall over 25 percent and 35 percent year-over-year in 2002, respectively, which we believe increases the risks to the company's overall sales on the margin," Levy writes.

On Monday Ciena said it plans to record pro forma earnings of between 4 and 6 cents a share on revenues of $367.8 million for the quarter that ended October 31, 2001 (see Ciena Boosts Numbers, Cuts Jobs). The new guidance was a 19 percent sequential reduction but a 27 percent year-over-year increase. Prevailing expectations, until Monday, had been that Ciena would report earnings of 4 cents a share on revenues of $358 million.

Levy agrees that Ciena's sales visibility is "about as strong as any company in the communications technology industry," but notes that the majority of Ciena's sales come from long-haul DWDM systems and "this market has grown increasingly challenging since August."

"Much of Ciena's market share gains could be offset by a reduction in the overall WDM market, in our opinion. Furthermore, the expected severe cuts in carrier spending could even delay previously-expected CoreDirector sales, increasing the risks to Ciena's ability to execute despite its strong outlook for the product."

Analysts surveyed since Monday are, on average, expecting Ciena to earn five cents a share on revenues of $362.89 million for its fourth fiscal quarter of 2001, according to Multex.com. Levy's estimates for that quarter are roughly in line with everyone else's.

For fiscal year 2002, though, for which Ciena did not give guidance, the consensus estimate is that Ciena will earn 40 cents a share on revenues of $1.6 billion. Levy estimates Ciena will earn 35 cents a share on revenues of $1.56 billion.

Levy, who has been one of the most accurate Wall Street analysts in calling the past year's meltdown in telecom, first downgraded Ciena's shares on August 20 to Market Perform, and he has maintained that the Ciena's earnings risks were too large to warrant an investment (see Ciena Hit on Lehman Note).

In late morning trading on Wednesday, Ciena shares were down $0.24 (1.3%) to $18.19.

- Phil Harvey, Senior Editor, Light Reading
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