More Cuts at Ciena
Ciena’s stock fell 0.39 (3.85%) in afternoon trading to 9.73.
The Linthicum, Maryland-based company reported that it expected to only be able to announce $160 million in revenues for the quarter, ended on January 31. The amount was an adjustment from the company’s December forecast of $239.07 million, which already represented a sharp decline from its fourth-quarter revenues last year of $367.8 million. Gross margins for the quarter are expected to be below 20 percent, quite short of the forecasted 32.5 percent (see Ciena Casts Cloud Over 2002).
Ciena's troubles stem from a worsening outlook in the telecom sector at large. Last week Global Crossing Ltd. (NYSE: GX) and McLeodUSA (Nasdaq: MCLD) filed for bankruptcy, and yesterday Williams Communications Group (NYSE: WCG) announced that it is restructuring its balance sheet to avoid a possible default on its credit agreement. Today Qwest Communications International Inc. (NYSE: Q), one of Ciena’s largest customers, filed a shelf registration for $2.5 billion in debt and equity securities, in an effort to shore up its balance sheet (see Williams Winding Down?, Telecom: The Fear Factor, and Qwest Takes Steps).
“This is real indicative [of the entire carrier market],” CIBC World Markets analyst Rick Schafer says of Ciena’s announcement. “Ciena is a great canary in the coal mine. It’s an indicator of a really tough environment. Everybody is still trimming and cutting their capex.”
Ciena is especially feeling the pinch on long-distance transport, which has experienced a market-wide slowdown due to a sharp decline in customer build-outs of core networks. CoreDirector, the company's optical switching product targeted at metropolitan networks, remains its strongest product and could represent more than 50 percent of Ciena’s revenues in the April quarter.
Schafer expects that long haul is the area where cuts will have to be made over the next few quarters.
“If anything, they have to make some tough choices,” he says. “I don’t see them profitable in 2002 or 2003. That’s a lot of quarters with no cash. Long haul is the last place you’re going to see a rebound. Still, these are tough decisions. When things turn around, you don’t want to be caught with your pants down.”
The company warned that it anticipated a net loss in the range of 19 to 22 cents per diluted share, excluding restructuring costs, deferred stock compensation charges, payroll taxes, stock option exercises, and amortization of intangibles. This compared to earlier consensus estimates of analysts surveyed by Thomson Financial/First Call of a net loss of 11 cents per share. Actual net loss for the period is expected to be in the range of 21 to 24 cents per diluted share. The additional loss was due to several major customers making significant reductions in equipment purchases, the company said.
"We believe the telecom industry is a cyclical one,” Gary Smith, Ciena’s president and CEO, said optimistically on this morning’s conference call. "We do believe that our customers will again invest in the network."
With Ciena’s customers spending only where absolutely necessary, Smith said the company anticipates revenues for its second quarter to be flat or down from its first quarter. Some of the revenues, he said, were expected to be rollover from the first quarter. Final earnings results and forecasts will be announced on February 21.
A note issued by Lehman Brothers this morning recommends potential Ciena investors to remain on the sidelines and maintained a 3 Market Perform rating.
During the second quarter, Ciena expects to be hit with $9 million to $11 million in additional expenses related to the consolidation of research and development centers, work force reduction, and the closing of the Marlborough facility. The employees who have lost their jobs will be paid through April 5, 2002, and will be eligible for additional severance packages. They will also receive outplacement and assistance training, the company said. Development from the closing facility will be transferred to other locations, and Ciena doesn’t expect this to delay product introduction time-lines.
— Eugénie Larson, Reporter, Light Reading