Sponsored By

Ciena Spooks the Market

What happens when a customer can't pay?

September 5, 2000

4 Min Read
Ciena Spooks the Market

For those awaiting the potential stock-market ramifications of a slowdown in the telecom sector, Ciena Corp. (Nasdaq: CIEN) today provided a taste of the dark side. By writing off $28.2 million in sales it may not realize from a troubled customer, the company gave the entire telecom sector the jitters.

Ciena reported that bandwidth wholesaler Iaxis Ltd. (Web site terminated), one of Ciena's 36 announced customers, has received an administrative order in the U.K., the equivalent of a bankruptcy filing. This means that Iaxis, which reportedly has installed thousands of miles of fiber in Europe, won't be paying its bills anytime soon.

Ciena plans to record the shortfall as a one-time charge in its fourth-quarter financials, due December 7. The charge will be taken after a stock split scheduled for September 18. Ciena says the charge could take a maximum of 6 cents per share out of its earnings, depending on the final share price after the split.

At least one analyst says not to assume the write-off means Ciena won't get its money at some point. "My understanding is that Ciena's taking a conservative approach with this write-off. There's still a chance the company could collect some or all of the revenue owed," says Paul J. Silverstein, senior research analyst at investment bank Robertson Stephens.

Still, the news hit Ciena's stock hard: At market close, its share price had fallen 13.81, or 6 percent, to 216.31. Analysts used the example as the latest optical networking cautionary tale.

"I don't think this is indicative of any problems in Ciena's business case, but it shows that we're starting to see a new condition of business for optical vendors," said Christopher A. Nicoll, director at consultancy Current Analysis. He says companies need to think about the risks involved in having startup carrier customers. Those risks, he says, increase as optical vendors extend credit to help finance their customers, using a model that carriers have successfully deployed over the past few years.

Such nervousness appeared to permeate the market on Tuesday, and a down day on the Nasdaq didn't help the case. Sycamore Networks Inc. (Nasdaq: SCMR), which so far depends exclusively on revenue from carrier startups Williams Communications Group (NYSE: WCG) and 360networks Inc. (Nasdaq: TSIX; TSE: TSX.TO), lost 6.44, or 4.51 percent, to close at 136.38. Even networking blue chip Nortel Networks Corp. (NYSE/TSE: NT) shed 2 points (2.42 percent) to close at 80.75. "This is just one bad apple," said Gina Sockolow, analyst with Brean Murray & Co. Inc., of the Iaxis payment shortfall. "But the OC192 market is weak, and I am worried about the supercarriers having overextended themselves. When you get into the supercarrier space the volume is thinner."

Iaxis isn't the only service provider to suffer setbacks this year. A series of woes, ranging from Wall Street disapproval to outright bankruptcy, have made it clear that banking on carriers -- even established ones -- can be a risky proposition. (See GST Files for Bankruptcy and Wall Street says 'Whoa' to Williams).

In some ways, Ciena's lucky. Its original contract with Iaxis covered about $200 million over a three-year period. Ciena spokespeople acknowledge that Iaxis already paid much of this -- up until about March of this year. At that time, the provider underwent what appeared to be a reorganization, ostensibly in preparation for what was supposed to be a $6 billion IPO later this year. A group of investors, led by Bain Capital Group, took a $66 million stake in the pre-IPO startup. Still, the management of Iaxis apparently would not cede more than its 22 percent ownership. Now, the outcome of Iaxis remains a question.

Ciena wasn't the only vendor involved with Iaxis. Juniper Networks Inc. (Nasdaq: JNPR) and Nortel also sold them gear, but apparently didn't extend any credit terms. Juniper stock lost 1.50 (0.68 percent) to close at 220.13.

It's a blow to Ciena, but the vendor downplayed it. "This won't affect our ability to meet our projections," said spokesperson Bill Rose today. A press release issued by Ciena said the company did not factor any money from Iaxis into its projections. Those projections call for Ciena to earn about $280 million for the fourth quarter, with 20 percent sequential growth.

-- Mary Jander, senior editor, and R. Scott Raynovich, executive editor, Light Reading http://www.lightreading.com

Subscribe and receive the latest news from the industry.
Join 62,000+ members. Yes it's completely free.

You May Also Like