Ciena: Carriers Need to Spend Soon

If The Optimists Society needs to elect a new chairman any time soon, it could do a lot worse than approach Ciena Corp. (NYSE: CIEN) CEO Gary Smith.

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

waverunner 12/5/2012 | 4:09:59 PM
re: Ciena: Carriers Need to Spend Soon Since 2002 capping rings and overlaying the latest is a rare event. Tell network planners they need to stretch that sunk cost in the ground and they will find a way. Engineers live for that. In any event, one can still make a good living topping off stretches of a network except you can't live on spares.

Looking at the Capex to Revenue ratio is faulty, a better indicator is Capex to Free Cash. But the big blind that GS fails to mention are frozen credit markets, until those begin to thaw Network planners will push the limit of networks, deferring capex for a long while.
Creagh 12/5/2012 | 4:09:58 PM
re: Ciena: Carriers Need to Spend Soon I think the WWW Packets issue is interesting, along with Nortels MEN plans - it begins to illustrate an accelerating trend i.e. for some large carriers to move away from an independent ethernet switching layer in their networks. The trend appears to be a plan for an integrated Ethernet & optical transport solution, like Matisse are doing in the enterprise space. My guess is that the cost, for example, for a carrier the size of say DT to deploy Ethernet Switches to support say National Rollout of IPTV would be enourmous ...then operational costs would only keep growing as the network evolves. I don't believe Ciena WWW revenues are going to grow significantly and may never really get going at all.
rahat.hussain 12/5/2012 | 4:09:42 PM
re: Ciena: Carriers Need to Spend Soon @OpticOm: i really think creagh is not affiliated with matisse. he works for a competitor who wants to bring the hard-working folks at matisse down.

odo <- the eternal conspiracy theorist!
OpticOm 12/5/2012 | 4:09:42 PM
re: Ciena: Carriers Need to Spend Soon Your intended promotion of the failed Matisse is laughable...
wdlee 12/5/2012 | 4:09:42 PM
re: Ciena: Carriers Need to Spend Soon I cannot believe he would state this publicly... he is going to look even more stupid when things continue at a snails pace this year. When you have many economic experts saying the economy will be lucky to recover next year let alone this year.

I am not sure if this is wishful thinking, or ignorance.

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