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Financial

Will Ciena Put Cash to Use?

NEW YORK -- Things may not be as bad as they seem these days. For example, many companies are sitting on piles of cash. Of course, some investors are eyeing that cash, and wondering whether it will be used properly, rather than steadily incinerated.

Investors here at the UBS Warburg conference drilled Tom Mock, vice president of portfolio management for Ciena Corp. (Nasdaq: CIEN), on that very topic. How does the company plan to use its $1.7 billion worth of cash and investments?

Mock didn't give any clear responses to these questions, but he told investors that the company has a cushion of 28 quarters worth of cash if it can keep its burn rate down to $70 million per quarter.[Ed. note: 'Hey, we're burning it slowly, okay?'] Some analysts say this is a rather aggressive target. As of August 22, when the company reported its third-quarter results, its burn rate was well over $100 million (see Ciena Follows the Incumbents). And its revenues were only $50 million for the quarter, according to its 10Q filed with the Securities and Exchange Commission (SEC).

“That sounds a little ambitious to me, given their current burn rate,” says Rick Schafer an analyst with CIBC World Markets. “They have a tremendous balance sheet, but if they’re burning through $100 million plus a quarter, it won’t be that great for long. They’re going to have to make some tough decisions to rationalize the business.”

So what should it do with all that cash? Some investors in the audience today suggested that Ciena use a portion to buy back some of its debt.

Currently Ciena's bonds are yielding about 10 percent. With optical networking business in the gutter, the company might make a better return by paying down its debt rather than investing more in research and development. Mock wouldn’t comment specifically on this topic except to say that the company is investigating all of its options right now.

But the company might also be saving its cash for something else -- some investors were speculating today about possible acquisitions. While Mock said in an interview after the presentation that the company is not close to announcing any acquisitions, he did say that it's looking into areas where acquisitions might make sense.

“In this kind of environment consolidation will happen,” he said. “And like any prudent company we are exploring those options.”

He said during his presentation that carriers are looking to cut back on equipment suppliers, which means that they are looking for vendors that can offer a wide range of products. Currently, Ciena offers only optical switching and transport gear. As a result, experts speculate that Ciena might be interested in buying a next-generation ATM company. It already has investments in two startups: Équipe Communications Corp. and WaveSmith Networks Inc.

“ATM and multiservice switching would certainly make sense for them,” says Schafer. “A lot of those next-generation ATM boxes are getting deployed. That’s where the money seems to be right now.”

Mock agreed that ATM switching is interesting, and he did not discount the idea that Ciena might be investigating this avenue. He also made it clear that Ciena would not be looking at taking out direct competitors like Corvis Corp. (Nasdaq: CORV), Sycamore Networks Inc. (Nasdaq: SCMR), or Tellium Inc. (Nasdaq: TELM).

“We’ll let the market take care of that,” he said.

Ciena closed up $0.38 (10.22%) to $4.10. It reports its fourth quarter and 2002 yearly earnings on December 12, 2002.

— Marguerite Reardon, Senior Editor, Light Reading
www.lightreading.com Movers and shakers from more than 100 companies – including Ciena – will be speaking at Lightspeed Europe. Check it out at Lightspeed Europe 02.

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mellonHead 12/4/2012 | 9:20:49 PM
re: Will Ciena Put Cash to Use? Well, strictly speaking they did assume a bond
issue Cyras had outstanding to the tune of a
little over $100M. This was paid out in cash
2 quarters ago.

mH
lightmaster 12/4/2012 | 9:20:36 PM
re: Will Ciena Put Cash to Use?
Puddnhead... not to get caught up in a definition of money, my point is to say that it is incorrect to somehow imply that these aquistions did not cost anyone real money just because they were made with stock. They did not cause an outlay of cash, but they cost the stockholders real money.

For a company like Cisco, who gives up a fraction of a percent of shares outstanding for each aquisition, the effect is negligible. Not for Ciena.

In 1997, prior to Ciena going on it's aquisition path, they had 100M shares outstanding, 200M normalized for a later split.

Given new shares issued for aquisitions of Omnia (now defunct), Lightera, Cyras, ONI, (and a few other minor items)... Ciena now has over 400M shares outstanding ( vast majority of which was issued for the aquisitions).

Each shareholder has had his/her ownership in the company halved due to aquisitions.

If the aquisitions more than doubled the value of each share, they in whole would be a good move and worth the "money" that was paid.



puddnhead_wilson 12/4/2012 | 9:20:31 PM
re: Will Ciena Put Cash to Use? 1) yes, that is true, Ciena did assume $100m of Cyras convertibles, so it was not technically all cash.

However, I don't think that fact really brings us all that much closer to making true BobbyMax's statement "Ciena spent a lot of money on Cyras and ONI." Especially since the ONI acquisition was more than $100m cash accreditative net (i.e. they issued all stock, and in return got net cash (cash less debt) of ONI of WAY moe than $100m than $100m

2) Yes of course the acquisitions are dilutive. But you might argue that in the Cyras case those shares they issued were overvalued (at $90 apiece I believe).

>Given new shares issued for aquisitions of Omnia (now defunct), Lightera, Cyras, ONI, (and a few other minor items)... Ciena now has over 400M shares outstanding ( vast majority of which was issued for the aquisitions). Each shareholder has had his/her ownership in the company halved due to aquisitions. If the aquisitions more than doubled the value of each share, they in whole would be a good move and worth the "money" that was paid.

Believe it or not, I think they did. Even with the Omnia bust, and Cyras perhaps, the Lighteria acq mor than moakes up for them. I maintain that Ciena as a LH-only shop, without CoreDirector, *would* be worth less than half of what it is now.
This is true in terms of future potential and current revenue. Let's not beat around the bush, the market of the pre-acq core business from 97 (DWDM) stinks right now.

The jury is obviously still out on ONI.
MrLight 12/4/2012 | 9:20:28 PM
re: Will Ciena Put Cash to Use? Ciena has quite a number of options over other optical networking companies because it has customers, it has an installed product base, it has a brand, and it has access to the capital markets.

What I think Ciena needs to do is to put it's cash to use in four-ways:

1) Service its existing customers in a most cost efficient manner as possible,
2) Improve the competitiveness of its existing product portfolio,
3) Focus R&D on a disruptive technology for 2004. The "Innovator's Dilemma" kind of stuff.
4) Keep money around to finance ongoing operations for staying in the game until 2005 when the telecom market returns to historical (pre-ILEC) spending levels.

So for the short term Ciena should focus on strengthening its current business relationships, improving its margins on its current "main" products, and increase its stock rollover. Nothing-glamorous here, just hard work. If they do, this CienaGĒÖs stock value should recover so they can again look at some strategic acquisitions.

Note: I said strategic and not tactical customer-grab acquisitions, meaning a company that is either addressing or has the technology for addressing a new and expanding market, not just the current market.

The critical piece will be what is Ciena doing to solve the optical networking problems of 2004. I stress optical networking because Ciena is an optical networking company.

So what are those issues - well, what about the cost inequity of employing the same amount of network capacity and network equipment to transport a lower rate optical connection as a higher rate, say to transport a DS3 as a 1 Gbps. This clearly is not sustainable. Wavelengths need to right-sized to provide some correlation between the rate of the connection and its cost. Hopefully not by placing STS-1 switches everywhere. All that does is introduce another variable that has to be also minimized GĒō stranded STS-1 switch fabric.

Another is the lack of an optical layer that can be leveraged by the Ethernet and IP layers for provide deterministic, granular and secure connections in a scalable form.

Why, are these important, well because it would allow the carriers to increase the size of the telecom pie by making bandwidth more of a utility and the connection of that bandwidth as the service by clearly providing a separation between the cost of bandwidth and the cost of making connection.

So Ciena, get positive attitude and go do the "Innovator's Dilemma" kind of stuff to be ready for 2004.

MrLight :-) Just shedding another light on Ciena
P.S.Disclaimer - I do not own any Ciena shares.


lightmaster 12/4/2012 | 9:20:28 PM
re: Will Ciena Put Cash to Use? Puddnhead,

Agree on amost all your points, one modification. Even with Lightera, Ciena is basically relegated to long haul. The CoreDirector has sold mainly into long haul applications as a 3/3 DCS replacment. In order to sell it into metro, they need VT level grooming. They wanted to get it by combining the Coredirector with Cyras, but it didn't seem to work out.

IMO, Ciena has never understood metro because Ciena is a technology company dominated by PHDs and ex-engineering VPS running marketing. Very good PHDs and engineers, granted, but metro is not just about moving bits around cheaper and it's not about trying to force RBOCs to change their network architectures to fit optical technology.

I even wonder sometimes if Ciena understood the value of the STS grooming in the Lightera product or just got lucky and chose them because they knew the company well (VP of Mkt and VP of sales at Lightera were ex-Ciena).

On the ONI aquisition... it's probably a wash or positive in terms of earnings per share since long haul is disintegrating just as fast or faster than ONI's business. It wasn't, however, the aquisition that will bail them out as I believe they had hoped. From a timing point of view, they bought on the way down, when the company was fully valued (my broker tells me that's a bad idea). There was no real upside. It would have been a better aquisition if done a few years earlier, at the same value, on the way up. But then, that would have taken vision...
puddnhead_wilson 12/4/2012 | 9:20:27 PM
re: Will Ciena Put Cash to Use? yes, very hard work. No one is disputing that. In fact, much of what you are suggesting MrLight is mutually exclusive (e.g. improve current products & research new ones, while preserving money), or perhaps just plain impossible in the current depressed (buyers) market (improve margins). It's said that Nortel have signed some recent contracts at a loss just to keep the lines form idling (and losing more).

----

>What I think Ciena needs to do is to put it's cash to use in four-ways:

1) Service its existing customers in a most cost efficient manner as possible,
2) Improve the competitiveness of its existing product portfolio,
3) Focus R&D on a disruptive technology for 2004. The "Innovator's Dilemma" kind of stuff.
4) Keep money around to finance ongoing operations for staying in the game until 2005 when the telecom market returns to historical (pre-ILEC) spending levels.

So for the short term Ciena should focus on strengthening its current business relationships, improving its margins on its current "main" products, and increase its stock rollover. Nothing-glamorous here, just hard work.
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