What does it mean when an unprofitable high-tech company like Ciena (NASDAQ:CIEN) refuses to spend what it takes to develop new products?

On the plus side, it can mean rising margins and apparent progress toward making a net cash profit. On the minus side, though, the company is mortgaging its future. The only thing constant in high technology is change, and depending on last year's technology to drive tomorrow's sales is the surest way to make your products, your business, and your stock obsolete.

Everyone up on Wall Street is rejoicing today over the telecom equipment maker's "pro forma profits" and its break-even results under generally accepted accounting principles this quarter. But I can't help but look on the news with foreboding; once again, Ciena slashed spending on research and development.

Over the last six months of fiscal 2006, Ciena grew its sales an impressive 27%. The company nearly doubled its gross margin compared to the fiscal first half of 2005, growing it from 25.9% to 45.1%. Ciena also slashed operating costs 22%, shrinking its operating loss in the process. But to this Fool's mind, none of that good news outweighs the additional $12 million Ciena cut from its budget for R&D, a 17% spending decrease from last year. You see, as Ciena was cutting down, several of its competitors were bulking up:

Year-over-year change in R&D spending



Redback Networks (NASDAQ:RBAK)




Lucent (NYSE:LU)




Nortel (NYSE:NT)


All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects fiscal-year-to-date R&D spending, versus same period from last fiscal year.

Ciena thus comes in last in this list in its rate of ramping R&D investment.

Its place in the rankings doesn't seem to concern Ciena CEO Gary Smith, however. In forecasting the company's future, he said, "We expect market demand will enable us to accelerate our revenue growth in the second half of our fiscal year compared to the first half." That's fine and dandy if all you care about is what happens three months down the road. Foolish investors need to look further, and ask what the future holds for a company that refuses to invest in it.

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