Is telecom back? Judging from the price performance of telecom equipment maker Ciena's (NASDAQ:CIEN) shares, you could be forgiven for thinking it is. Over the last 52 weeks, Ciena's shares are up 71% in value, against a mere 6% rise in the S&P 500. Tomorrow we learn whether there's room left to run, as Ciena delivers its progress report for fiscal Q2 2006.

What analysts say:

  • Buy, sell, or waffle? Two dozen analysts follow Ciena, but only three of them think it's worth buying. For the rest, 14 say hold the shares, and seven more say s
  • Revenues. And yet, these same analysts think sales grew 24% in fiscal Q2 and will be looking for $129.1 million in sales tomorr
  • Earnings. They also expect the firm's continual losses to shrink a bit and come in at just $0.01 per share.

What management says:
Ciena's most recent announcement of note was that it's issuing $300 million in convertible debt at a very attractive interest rate (0.25%). The firm did not make clear its purpose in issuing the notes. They could be intended to swap out higher interest debt (Ciena had over $540 million in long-term debt at last report, against nearly $800 million in cash and equivalents). This is an issue Ciena has been working on -- buying back $106 million in 3.75% interest rate paper for $99 million last quarter, for instance. Or the new debt could simply be aimed at giving Ciena more breathing room as it awaits the telecom industry's turnaround. At the firm's current rate of cash burn, the extra $300 million could fuel Ciena's free cash flow-negative operations for an extra 28 months or so.

In March, Ciena announced that its Shrewsbury, N.J., facility would be shut down at some point in the quarter just ended, resulting in charges to fiscal Q2 earnings ranging from $3.8 million to $8.1 million (roughly $0.01 per share).

What management does:
Happy day! The last trailing-12-month period marked the first time since July 2001 that Ciena booked less than $1 in losses for every $1 it collected in revenues. Gross margins continue to rise, as operating and net losses decline.

Margins %

10/04

1/05

4/05

7/05

10/05

1/06

Gross

24

23.1

26.5

28.9

31.9

35.9

Op.

(90.1)

(79.4)

(68.5)

(55.3)

(43.6)

(33.1)

Net

(264.3)

(235.4)

(215.7)

(173.3)

(102)

(85)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Let's revisit the Shrewsbury closure announcement for a second. More interesting than the immediate charge to earnings that will result, or the cash outlays that will follow in coming quarters, was Ciena's statement that the closure will result in "headcount reduction of 62 employees, the majority of whom work in research and development." This bit of trivia reminds me of a trend we saw last year, toward Ciena making substantial cuts to its research and development budget. (See Ciena Slashes, Stock Burns and Ciena Sings Same Song for details.)

Over the last six-month period, Ciena grew its sales by 34%. Commendably, the firm kept the rise in selling, general, and administrative costs to just a fraction of that -- 6%. Meanwhile, R&D spending got cut by 15%. While I'm all for perpetually money-losing companies cutting their costs, I have to again wonder whether perpetually money-losing high-tech firms should be doing that cost-cutting in the R&D department. This is one issue we'll want to keep on watching, lest continued underinvestment in R&D ultimately cripple the company's ability to develop the kinds of new products that its sales depend upon.

Competitors:

  • Cisco (NASDAQ:CSCO)
  • Lucent (NYSE:LU)
  • Nortel (NYSE:NT)
  • Redback Networks (NASDAQ:RBAK)
  • Tellabs (NASDAQ:TLAB)
  • UTStarcom (NASDAQ:UTSI)

Fool contributor Rich Smith does not own shares of any company named above.