Drip Portfolio Ciena's Colorful Life

The Drip Port fiber optic tour rolls on with an introduction to Ciena, one of the contenders in our high-growth investment study. After a blockbuster IPO, the company ran into a few speed bumps on its way to recent success. Today we cover how Ciena was born, what it does, and its competition.

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By Vince Hanks
December 5, 2000

Continuing our tour of the emerging optical networking sector, we find ourselves close to home. Just a hop, skip, and 41-mile jump up the road from Fool Global HQ, we bring this bus to a stop in Linthicum, Maryland, home of Ciena Corporation (Nasdaq: CIEN).

In the beginning
Ciena entered the market with a flash in 1996 when it developed the first dense wavelength division multiplexing (DWDM) system -- a process that significantly increases bandwidth by sending data simultaneously over many colors of light, using multiple lasers, and combining the beams with a prism. DWDM saves telecommunication carriers the expense of digging up lines and adding more fiber to existing networks to increase bandwidth. The development of DWDM was one of the key events that led to the recent fiber optic boom.

About a year later, the company launched a very successful IPO and celebrated, oddly enough, by parting ways with its founder and CEO, David Huber. Disharmony with Ciena's management team prompted Huber to fly the coop five years after he formed the corporation. He landed softly enough, unveiling a new optical networking company and direct competitor to Ciena in Corvis Corp. (Nasdaq: CORV). The tension between the two companies remains today and has spilled over into some nasty patent litigation in the brief history of the duo.

In 1998, Ciena rowed some rough waters when the merger with Tellabs (Nasdaq: TLAB) fell through, followed by an anemic quarterly report. The stock, which had been trading around $45 per share (split-adjusted), suddenly found itself trading in the $4 range. Investors were not amused.

Customers, on the other hand, were beginning to like what they were seeing. By the end of 1999, the number of vendors contributing to revenues more than doubled from a year earlier, topping off at 29, compared to 14 at the end of 1998. Despite this, revenues for fiscal year 1999 came in at $482 million, below the prior year's figure of $502 million. Competition was heating up and Ciena was breaking lances with the big boys at Lucent Technologies (NYSE: LU) and Nortel Networks (NYSE: NT).

In an effort to diversify its product line and hold its ground against the market giants, Ciena acquired privately held Lightera Networks and Omnia Communications in early 1999. The company expects those two deals to be accretive to earnings in FY 2000.

Recent results
During the first nine months of FY 2000, Ciena saw its customer base dip a bit to 27 vendors, among them long-distance carriers, competitive local exchange carriers (CLECs), Internet service providers (ISPs), and wholesale carriers. Three of these customers alone accounted for 77.5% of Ciena's latest quarterly revenue. Third-quarter 2000 revenues derived from foreign sales equaled 30.2% of total revenues, down from 40.3% in the third quarter 1999.

Revenues for the first three quarters grew 67.6% to $571.2 million over the same period last year. Net income totaled $55.6 million versus a loss of $8.4 million. Gross margins reached 44.1% and net margins rang in at 8.4%. The five-year estimated annual growth rate is 35.4%.

Ciena reported an increase of 601 employees in FY 2000, up to 2,529 total. Based on its recent trading range, Ciena has a market cap around $29 billion. The company does not pay a dividend.

That wraps up our introduction to Ciena. Next time we'll dig around the financials. The company reports its fourth-quarter numbers on December 7. Earnings of $0.12 per share are expected, up from $0.02 last year. To discuss Ciena, visit us on the Drip Companies board.

Drip on, Fools!

-- Vince Hanks, TMF Elwood on the Fool discussion boards

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12/5/00 as of ~8:30:00 PM EST

Ticker Company Price
Change
Daily Price
% Change
Price
CPBCAMPBELL SOUP(1.38)(4.10%)32.13
INTCINTEL CORP3.069.30%36.00
JNJJOHNSON & JOHNSON(0.06)(0.06%)99.50
MELMELLON FINANCIAL CORP1.633.48%48.31
PEPPEPSICO INC0.380.86%44.19

  Day Week Month Year
To Date
Since
7/28/1997
Annualized
Drip3.67%3.19%(1.26%)8.27%29.59%8.02%
Comparable S&P 500n/an/an/an/a19.06%5.33%
S&P 5003.89%4.66%4.68%(6.31%)46.63%12.07%
S&P 500 (DA)3.82%4.58%4.60%(6.21%)49.25%12.66%
NASDAQ10.48%9.24%11.23%(28.99%)84.11%19.92%

Trade Date # Shares Ticker Cost/Share Price Total % Ret
9/8/9749.5166INTC24.2436.0048.80%
10/7/9837.4877MEL34.8348.3140.81%
11/14/9716.236JNJ80.1199.5025.44%
7/28/005PEP48.0044.19(7.94%)
4/13/988.465CPB53.8132.13(38.35%)

Trade Date # Shares Ticker Total Cost Current Value Total Gain
9/8/9749.5166INTC1,200.411,782.60585.78
10/7/9837.4877MEL1,305.641,811.12532.77
11/14/9716.236JNJ1,300.691,615.48330.85
7/28/005PEP240.00220.94(19.06)
4/13/988.465CPB455.50271.94(174.69)
 
Cash: 
Total: 
0.04
5,702.12
 


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.