Rumors of the telecom industry's life have been greatly exaggerated.
Nearly three months ago, I wrote about telecom equipment maker Ciena's (NASDAQ:CIEN) announcement that, among other things, it was expecting revenues to fall rather than rise (as previously predicted) and cash burn to continue apace (at about a quarter billion dollars per year).
Since then, Ciena has adopted an opportunistic defensive stance. On the opportunism front, it purchased two small, privately held telecom equipment makers -- Internet Photonics and Catena Networks -- to strengthen its position in the broadband market against an eventual industry rebound.
On defense, Ciena chose not to pay cash for the purchases (cash -- how quaint); rather, it negotiated both acquisitions as pure stock transactions. While this will dilute the shares of existing holders by 21.5%, it will also preserve Ciena's $1 billion cash-and-equivalents war chest.
Last Thursday, Ciena announced another defensive move to conserve that cash pile: It will lay off 25% of its employees and close its San Jose, Calif., facility. The company believes that these two measures will save it up to $70 million a year in costs -- essentially accomplishing its stated goal of reducing operating costs by 10% to 20% annually.
The thing is, it looks to this Fool like Ciena had an 18% reduction in operating costs in the bag even before making this move. In the first quarter of 2004, its operating costs were just shy of $90 million. For all of fiscal 2003, they were nearly $440 million -- an average of $110 million per quarter. So the company was already on track to make its expense-reduction target when it suddenly announced a plant closing and layoffs. Why?
In my opinion, because it's likely Ciena does not see the telecom industry reviving any time soon. Remember that the company has enough cash in its coffers to weather roughly four years of stagnant telecom sales as it waits for a revival. If Ciena sees a need to cut its costs further, that suggests that it has doubts as to whether telecom will revive before its cash runs out in 2008.
That bodes ill for Ciena shareholders in the short term. It also suggests that we could soon see a wave of similar cost-cutting moves among the Ciscos (NASDAQ:CSCO), Lucents (NYSE:LU), and Nortels (NYSE:NT) of the world.
Is Ciena shoring itself up for more potential troubles ahead? Talk about it with other Fools on our Ciena discussion board.
Fool contributor Rich Smith owns no shares in any of the companies mentioned here.
