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3 Reasons Ciena Corporation Is Staying Ahead of the Competition

By Billy Duberstein - Sep 26, 2017 at 7:10AM

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The company's "secret sauce" for outperformance lies in these three attributes.

In researching my latest article on Ciena's (CIEN -2.63%) recent quarter, I found a lot to like about the company. As Foolish investors, we are always on the lookout for companies with outstanding vision, and I believe management's current strategy is setting Ciena up for long-term success. Here are three things the company does right. 

It recognizes problems

Make no mistake: Ciena is in a difficult industry. The company's main business is selling hardware -- mostly wave division multiplexing equipment -- which helps service providers, telecoms, and cable companies boost internet speeds on existing fiber-optic networks. While that's certainly a growth area, it's also subject to the spending cycles of its clients, highly competitive, and dependent on technological superiority.

Ciena doesn't sugarcoat this in its financial reports. In fact, the company admits it works in an industry that is "highly competitive and fragmented." Ciena also admits it has to price its offerings very aggressively in order to win new customer deployments. 

If that weren't difficult enough, there is also a secular change going on in the industry toward software-defined networking. Advances in technology have allowed networking hardware and software components to become increasingly disaggregated (kind of like cord-cutting is hurting the cable bundle). That's allowing customers to deploy advanced software on top of standardized ("white box") hardware for "good enough," yet much cheaper, solutions. This phenomenon is why so many old networking companies are struggling at the moment.

However, because Ciena is quick to acknowledge these problems, it has course-corrected, as you will see below. 

woman celebrating at office desk smiling

Why Ciena is best-of-breed. Image source: Getty Images.

It diversifies

Because Ciena "keeps it real" in understanding its industry, it has prepared and executed on a plan to mitigate these negative effects. One way the company does this is by diversifying its product portfolio, supplementing its core optical networking products with packet networking equipment and now software. In addition to product diversification, it has also aggressively diversified its geographical footprint by partnering with third parties such as Ericsson and TE Connectivity. Ciena now boasts over 1,300 customers all over the world, including 80% of the world's leading network operators.

While Ciena must, of course, give up some profits to these partners, that global diversification has made the company more resilient when one geography or product slows down, as is happening now in North America. That's why Ciena has continued to churn out profits even as competitors are currently losing money.

It opens itself up

Finally, Ciena has adopted the correct mindset for 21st-century tech companies -- being open and collaborative. In fact, the company has embraced this principle as its "OPn" corporate philosophy. In its recent quarterly filing, the company states, "OPn has evolved and expanded from an architecture into our governing philosophy and broader belief system, which is rooted in enabling choice in the market through openness." 

This is a marked contrast from traditional enterprise vendors, who typically wish to supply customers with a full "stack," or a completely integrated product, from a single vendor. Now, however, enterprise customers have more choices between cloud, hybrid cloud, and on-premise data centers; traditional and white box networking solutions; and proprietary and open-source software.

Many legacy enterprise companies such as Cisco (CSCO 0.97%) and IBM (IBM 2.00%) are struggling with this transition, as they benefited mightily from the old "closed system" paradigm. Ciena, however, has gone full-on open.

For instance, Ciena is selling its proprietary digital signal processing (DSP) chip to optical networking component vendors Oclaro, Lumentum, and Neophotonics on a non-exclusive basis, to be assembled in other hardware boxes. That means that Ciena could be competing against white box solutions using Ciena's own proprietary technology! That would have been unheard of in the old days, but CEO Gary Smith wants to have its products with customers, no matter what format the customer chooses.

Another example includes Ciena's Blue Planet software, which is built on a microservices architecture. Microservice is a relatively new way of writing software in small, modular bits of code that connect through application programming interfaces (APIs). That means instead of having one long, monolithic piece of code (which is a pain to change, and therefore, to switch away from), the software is stacked together in small functional bits. Customers can thereby customize code for their specific needs, and Ciena can update software and fix problems much quicker than the old way. Thus, by ceding some control, Ciena allowed its customers greater freedom, which has made the company a preferred partner. 

Ciena is outperforming competitors in a tough industry environment. By recognizing industry challenges, diversifying its customer base, and opening itself up, the company seems poised to succeed over the long term.

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Stocks Mentioned

Ciena Corporation Stock Quote
Ciena Corporation
$48.87 (-2.63%) $-1.32
International Business Machines Corporation Stock Quote
International Business Machines Corporation
$133.80 (2.00%) $2.63
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
$43.77 (0.97%) $0.42

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