It was late September and Ciena Corp. (Nasdaq: CIEN) was on top of the world. The company had just announced it had won a contract to supply Korea Telecom and its shares were trading at an all-time high. All was grand in the fiber optic world and there was no slowdown in sight. Or was there?

Just a few days later, Sanford C. Bernstein analyst Paul Sagawa released a research note stating that growth in spending on telecom equipment was likely to show a "sharp deceleration" from 28% in 2000 to 20% in 2001. He also said that the first quarter ended October 31 will be "the last quarter of accelerating sales growth."

Along with this opinion, Sagawa downgraded many of the big names in the industry, including Nortel Networks (NYSE: NT), Cisco Systems (Nasdaq: CSCO), Ericsson (Nasdaq: ERICY), Lucent (NYSE: LU), Motorola (NYSE: MOT), and Nokia (NYSE: NOK).

The debate begins
Sagawa had unveiled the industry's first significant version of kryptonite and a majority of the fiber optic highflyers were weakening from the exposure. Within two months, Ciena had been cut in half, closing on November 29 at $73 per share.

The meat of Sagawa's argument was that capital spending by telecommunication carriers was growing at a higher clip than revenue growth and this trend would not be sustainable for any length of time. He also noted that only a handful of these carriers were currently cash flow positive, meaning most would need to seek financing to maintain growth in spending.

The flip side of the dispute is simply demand. Customers want speed. Customers demand bandwidth. And when they get it, they want more. Remember when you moved from a 2400 baud modem to a 9600? That was a nice improvement. You stopped there, right? Uh, no. We always want more. Businesses always want more. More. Faster. More.

The debate of capital spending versus demand for bandwidth is not likely to be resolved anytime soon, and it's likely both sides will claim victory. Surely some carriers will need to slow down capital spending and others will try to pick up the slack. The race to build better, faster networks will certainly continue for the foreseeable future.

"Can't Slow Down" and Other Lionel Ritchie hits
Ciena's Chief Operating Officer Gary Smith said he doesn't expect to be a victim of an anticipated capital spending slowdown by other phone and data carriers. Unlike competitors such as Lucent and Nortel, which continue to derive a significant portion of sales from older technologies such as telephone traffic, Smith feels Ciena is well-positioned to maintain sales growth of its high-speed optical networking solutions.

The most recent results seem to support the company line. Fourth-quarter revenues climbed to $287.6 million, representing sequential revenue growth of more than 23% over the company's fiscal third quarter revenue of $233.3 million, and an increase of more than 100% as compared to the same period a year ago. Net income for the quarter more than quintupled compared to the same period last year, and was up 46% from the third quarter.

The company also raised expectations for fiscal 2001, targeting revenue growth of 75% to 85%, and earnings of $0.67 to $0.70 a share, excluding one-time items. Analysts had previously projected revenue growth of 60% to 65% and earnings of $0.63 a share.

Gross margin in the fourth quarter was 45.1%, falling just below the expected 45.5% due to a new contract manufacturing agreement, which Ciena says will cost less over time.

Ciena continued to diversify its customer base in the fourth quarter, adding four new customers including carriers Interoute and Broadwing (NYSE: BRW), and web hosting company Genuity (Nasdaq: GENU). The company's total optical networking equipment customer base now totals 42, with 27 contributing to fourth-quarter revenues.

The fourth-quarter pro forma results included a charge of $15.5 million related to missed payments by U.K.-based Iaxis. Smith said the company is not experiencing problems with any other customers and the company expects to recover a portion of Iaxis' failed payments. Iaxis was recently bought out by Dynegy, which has become one of Ciena's new clients.

Ciena's latest results prove, if nothing else, that telecom spending is not slowing across the board. As the Fool's new Industry Focus 2001 discusses in analyzing this industry and its leaders, the companies that are positioned to provide a high-speed data solution that customers demand will surely have an advantage over their less-focused bretheren. 

Drip on, Fools!

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