Ciena's fourth quarter revenues are set to be about 20 percent below previous expectations because large carriers, predominantly in North America, are "scrutinizing their expenditures," Smith said during today's earnings call. (See Ciena Slumps on Q4 Outlook.) The result is that "orders, deployments and revenue recognition" are getting pushed out.
Smith was keen to point out that no orders have been canceled.
Any hiatus in major operator capex hurts Ciena, as it's still so reliant on a few customers. In its third quarter, which ended July 31, the vendor's three largest customers generated 48 percent of all revenues -- roughly $122 million of a total $253.2 million. Two of those three customers are North American operators, while one is international.
Smith believes sales will pick up again before too long. "We believe this will be a short-lived but multiquarter slowdown," as the carriers adjust their business models to new customer demands, stated the CEO.
But he told analysts that it wasn't the case that large carriers had built up a lot of redundant capacity in their networks, a situation that could result in a prolonged lull in optical investment.
"Carriers don't have a lot of spare capacity. They can run their networks a little harder and be careful about capex, and they can do that for a few quarters, but they haven't overbuilt. They're scrutinizing their dollars more carefully at the moment, but they'll need to add capacity and migrate to NGNs [next generation networks] to reduce their operating costs," Smith said.
And they have the money to make those investments, noted Ciena CFO Jim Moylan. "The carriers have the money and are in good financial shape," he noted.
If the worst does happen, though, and macroeconomic conditions cause a further shift in carrier spending, "we won't be afraid to make some difficult decisions" around costs, stated the CEO.
In the meantime, Ciena will continue to invest in its converged Ethernet/optical strategy that Smith believes will be a long-term sales driver. "The industry is still in the early stages of the Sonet/SDH to Ethernet transformation, and we're well positioned to benefit as that trend continues," said Smith.
Share price slump
But that's the long-term view. In the short term, Smith is staring at a share price graph that's going in the wrong direction. While the company's third quarter sales and earnings were as expected, the fourth quarter warning has sent Ciena's stock crashing: By late morning the share price was down $4.29, or nearly 25 percent, to $13.14.
While that dip is somewhat precipitous, it's in line with the general trend, which has seen Ciena's share price slide from $38.01 this time last year to $17.43 by the close of trading Wednesday (see chart below), followed by today's slump.
As a result, Ciena's market capitalization now stands at around $1.2 billion, not much more than the value of its cash and short-term investments, which together are worth nearly $1.03 billion.
What's with WWP?
The CEO is also under pressure from analysts about the performance of World Wide Packets (WWP), the Ethernet equipment vendor Ciena acquired earlier this year for $290 million. (See Did Ciena Overpay for WWP? and PBT Key to Ciena Acquisition.)
The acquisition, which closed in early March, contributed only $3 million in revenues to Ciena's second quarter, which ended April 30. (See Ciena Stays Strong in Q2.)
The WWP business, which is part of Ciena's "Ethernet access" group, along with broadband access, contributed $18 million in revenues during the third quarter and is expected to generate $25 million to $35 million for the full fiscal year. That puts WWP's expected fourth quarter revenues at anything between $4 million and $14 million.
The main benefits of that acquisition are set to come further down the line, it would seem. Ciena announced at the time of the takeover that it had already brokered a significant engagement with AT&T Inc. (NYSE: T), and while Smith says that contract is "on track" and has not been scaled down, it won't be contributing revenues until fiscal 2009, and more likely the second half of that financial year. (See Ciena Takes Out World Wide Packets.)
— Ray Le Maistre, International News Editor, Light Reading
Or will the capex hiccup last much longer than a few quarters?