Ciena: Carriers Need to Spend Soon
In September last year he said the slowdown looked "short-lived." (See Ciena CEO: Slowdown Looks Shortlived.)
Then in December he deployed the "it was worse last time" tactic following a fourth-quarter slump. (See Ciena: This Ain't No 2001! and Slowdown Smacks Ciena.)
Now Smith is now warding off the telecom sector pessimists with the theory that carriers will have no choice but to start investing in their transport networks again soon because they're reaching full capacity.
And he needs some sort of story after the vendor's first-quarter financials were released yesterday. (See Ciena Cuts 200 Jobs as Sales Plummet.)
Although Smith admitted on Thursday's earnings conference call that "this slowdown is lasting longer than first anticipated," his general pitch is the same as before, that the contraction of spending by operators -- they're spending half of what they could and are holding on to the other half for now -- isn't a trend that will last too long.
"We're talking about recovery in quarters, not years," he stated, adding later that "carriers are running their networks hotter –- they're living more hand-to-mouth."
What he means is that the operators are using up their spare capacity and will need to buy some more before too long. "Traffic demand continues to grow," and it's that demand and growth (driven by video traffic) that, ultimately, underpins demand for Ciena's products and services.
And Smith says he's not guessing about traffic growth and the increasingly "high utilization of networks" -- he says his views are based on "dialogue with customers."
Given those factors, Smith reckons the current capex-to-revenues ratio among the major operators is unsustainable. Based on the spending of Ciena's top 10 carrier customers –- a list that includes the likes of AT&T Inc. (NYSE: T), BT Group plc (NYSE: BT; London: BTA), Sprint Corp. (NYSE: S), and Verizon Communications Inc. (NYSE: VZ) -– average carrier capex ratios were 12.5 percent in 2008, down from 14 percent in 2007, and could be less than 12 percent in 2009, said the CEO.
"That's a historically low capex-to-revenues ratio, and we don't believe it's sustainable," stated Smith.
But while spending is that low, Smith has some short-term issues to deal with, such as profitability and product line performance. The profitability issues are being dealt with, in part, by cost-cutting -- hence the headcount reduction of 200 that's under way and due to be completed by the end of April.
Then there are the product lines. The popular CN4200 platform is still the star performer, generating $50 million of the "Optical Service Delivery" division's $130 million total during the first quarter. But while revenues from the CoreDirector multiservice switch were up about 19 percent from the fourth quarter at $45 million, that same product line was generating $70 million in revenues a year earlier.
Likewise, Ciena's long-haul transport products only generated $26 million in revenues in the first quarter, a sign that rivals such as Huawei Technologies Co. Ltd. and Infinera Corp. (Nasdaq: INFN) are making life tough for Ciena.
And the vendor's Carrier Ethernet Service Delivery division, which includes the World Wide Packets business acquired a year ago for $290 million, is delivering little in the way of sales -- just $10 million in the first quarter. Smith said on the earnings call that the "adoption of enterprise Ethernet services has been slower than anticipated." (See Did Ciena Overpay for WWP?.)
Ciena's share price stands at $6.01 today, up 8 cents, about 1.4 percent.
— Ray Le Maistre, International News Editor, Light Reading