By Richard McCaffery (TMF Gibson)
Ciena Oils the Machine, Tops Estimates
August 20, 1999
Telecommunications equipment maker Ciena (Nasdaq: CIEN) posted earnings of $0.01 a share for its fiscal third quarter, excluding merger-related costs, beating analysts estimates by a modest $0.02 a share.
The company reported sales of $128.8 million for the quarter, essentially flat from year-ago sales of $129.1 million. The Linthicum, Maryland firm is encouraging sequential quarterly comparisons, however, which may not be out of line since the market for optical devices that maximize bandwidth -- Ciena's specialty -- went berserk last year as rivals slashed prices to gain market share.
But price wars weren't Ciena's only troubles. At about the same time, AT&T (NYSE: T) backed out of a plan to use Ciena's optical products in its fiber network; a proposed $7.1 billion merger with Tellabs (Nasdaq: TLAB) collapsed; and Ciena warned investors of price pressures and flat revenues in the coming quarters. Ciena's stock price dropped to about $8 from around $90. Extreme? Yes, but that's what happens to growth stocks trading at high multiples when the road turns: Wall Street finds another ride.
Comparing the second and third quarters, the company fared better in terms of revenue growth, increasing its top line 15.5%. More importantly, gross margins increased to 38.4% from 36.1%. Operating margins also improved, to 47.6% from 37%.
That's good news for investors because aggressive pricing is expected to continue. As a result, the company must rely on operational efficiency and gains in market share to grow the bottom line. With competition from resourceful giants such as Lucent Technologies (NYSE: LU), it's unlikely Ciena will ever recapture the kind of gross margins it once enjoyed -- 61% in the third quarter of 1997. That doesn't mean there isn't room for improvement by building superior products and gaining a technological edge.
Meanwhile, demand for the company's products seems robust, and Ciena has taken steps to increase its customer base by hiring additional sales, marketing, and field support personnel. That is where the company has really shined: Ciena is now selling its optical equipment to 18 customers, up from 10 a year ago and 5 in 1997.
In the most recent quarter, three customers accounted for 58% of the company's revenue. A little lopsided, yes, but during the same period last year, two customers accounted for 72% of revenue. Recent new customers include heavyweights Alltel (NYSE: AT), Intermedia Communications (Nasdaq: ICIX), and RCN Corp (Nasdaq: RCNC). Ciena is clearly a broader, stronger company than it was a year ago.
The last four quarters have been trial by fire for Ciena. On sales of $128.8 million for the last quarter, income of $1.5 million gives the company a horrible profit margin of just 1.2%. The stock is priced high at $33 15/16. Kudos to management for hanging tough, growing its customer base, and working to improve operations. But investors might want to wait for improvements to show up at the bottom line before jumping on board.