Ciena: This Ain't No 2001!
What's he talking about? How can a year when Ricky Martin, Christina Aguilera, the Backstreet Boys, and Britney Spears were all among the best selling music artists globally, and Gladiator won the Best Film Oscar be considered any way bad?
Smith wasn't commenting on the quality of available MP3 player content, though. He was talking network iron.
According to Smith, the current economic slowdown isn't going to be as tough on the telecom equipment sector as the long, cold capex winter that chilled so many equipment companies, including Ciena, to the bone in 2001/2002. (See Ciena Hit on Lehman Note, Ciena's Day of Reckoning, and Ciena Casts Cloud Over 2002.)
Despite telling analysts and investors on Thursday's earnings conference call that the vendor was experiencing an "increasingly difficult environment" that resulted in a "disappointing fourth quarter," Smith said his team was operating the business under the assumption that the markets Ciena addresses "will not get significantly worse." (See Slowdown Smacks Ciena.)
That's quite an assumption. So, what's the basis for it? Well, things might be tough right now, said Smith, but they've been tougher in the past, and the circumstances are different now than they were six or seven years ago.
"The 2009 landscape is very different from 2001 and 2002. Then there was overcapacity in the networks and a disregard for economic fundamentals. Today, the demand for network capacity is real, there are market fundamentals, and most Tier 1 carriers are financially healthy. There is very little over-capacity in today's networks," stated Smith, who stressed that Ciena was experiencing delays and "push-outs" from carriers, but not order cancellations.
"Traffic growth, from increased video and increased mobility, is the capex driver, and that growth isn't changing. Sure, there's potential for the market to get worse, but we're not seeing that at the moment. We don't think this will be a multi-year downturn... This will be a multi-quarter recovery -- that's how we see it... [but] 2009 looks challenging for sure."
The CEO added: "Maybe the rate of traffic growth will slow, but it's incredibly unlikely to stop growing at all, though of course we could be wrong about that."
If things did take a turn for the worse, Ciena would cut costs further. The company currently has about 2,200 staff and $1.1 billion in cash, short-term investments, and long-term investments.
On the plus side, Ciena believes there's plenty of new network capacity to be built out yet. The vendor reckons the market is between $8 billion and $12 billion into a $70 billion to $90 billion outlay on new network capacity that will span a decade.
But different types of operators are reacting to the current economic conditions in different ways. Ciena's belief is that the big operators, while scrutinizing their spending more closely, are driving on with many of their capacity growth projects, while smaller service providers have pulled in the reins.
"Tier 1 operators with good financial health are continuing with their strategic investments" and will continue to invest to support new service creation and to drive greater efficiencies from their networks, stated Smith. "Most of the big carriers have visibility into their capex for the coming year."
However, it's a "more negative scenario" with the Tier 2 and Tier 3 carriers, some of which are focusing on getting what they can out of their legacy networks and holding back on next-generation network (NGN) investment plans.
The areas where carriers are not afraid to spend, because they are delivering in-demand services and helping to reduce operating expenses, are global optical mesh networks, Ethernet business services, and wireless backhaul. "Carriers are focused on, and committed to, these areas," stated Smith.
Ciena will be hoping that certain major carriers don't cut their spending too much in 2009, as the company revealed just how reliant it was on just two operators in its fiscal year 2008, which ended October 31.
Of its total 2008 revenues of $902.4 million, 25 percent, or nearly $226 million, came from AT&T Inc. (NYSE: T), while a further 13 percent, or $117 million, came from BT Group plc (NYSE: BT; London: BTA). And at AT&T at least, there's some economizing going on. (See Sizing Up AT&T's Cuts (and Chops) .)
Ciena's share price fell nearly 20 percent Thursday to $6.05 following its earnings call, and is down a further 3.8 percent, to $5.82 per share, in midday trading Friday.
— Ray Le Maistre, International News Editor, Light Reading