By
Ciena Aflame Richard McCaffery (TMF Gibson)
December 10, 1999
The only technology as hot as Linux these days is optical networking equipment.
So investors shouldn't be surprised to see telecommunications equipment company Ciena <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CIEN)") else Response.Write("(Nasdaq: CIEN)") end if %> continue its recent run of strong quarters, reporting net income for its fiscal fourth quarter of $4.5 million, up from a loss of $6.8 million (excluding merger related costs) a year ago.
The stock jumped more than $5 to about $66 in early trading today.
Earnings for the quarter jumped to $0.03 per diluted share, compared to a loss of $0.05 per diluted share last year. The company beat estimates by a penny as it added new customers to its revenue base.
This has been a focus point for the Linthicum, Maryland company since last year when AT&T <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: T)") else Response.Write("(NYSE: T)") end if %> backed out of a plan to use Ciena's optical products in its fiber network. Ma Bell's decision highlighted the company's reliance on a few vendors, and investors scattered when its blockbuster merger with Tellabs <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TLAB)") else Response.Write("(Nasdaq: TLAB)") end if %> fell through. The company's stock dropped from around $90 to $8 faster than you can say 'dense wavelength division multiplexing optical transport technology.'
The company has worked to bolster its product portfolio and customer base. In the most recent quarter it sold products to 23 vendors, up from 18 last quarter and 14 a year ago. Ciena now has 29 companies in its customer base, though the bulk of its sales remain centered on a handful of customers.
As a result of its steady progress, Ciena's stock has gone vertical again -- this time straight up. Over the last year shares are up more than 400%.
For the year, sales fell to $482 million from $508 million a year ago, a slip that was priced into its shares long ago and is largely the result of fierce competition. Pro forma net income (excluding merger related costs) for the year came in at $4.6 million, or $0.03 per diluted share, way down from pro forma net income of $76.5 million, or $0.60 per diluted share, a year ago.
The company expects revenue growth in the 50% range next year. Long term, analysts are betting it will grow 30% annually.
It's undeniable the company has improved profitability and margins from quarter to quarter this year, and it has broadened its product portfolio through the acquisitions of Lightera Networks and Omnia Communications.
Gross margins improved to 41% from 38.4% in Q3, and net margins jumped to 3% from 1.2%. It's cash flow situation through the first nine months of the year (Q4 isn't available yet) is also vastly improved from the same period a year ago. Not only is it spinning off cash from operations, but it netted free cash flow of about $16.5 million. Last year all these figures were in the red.
Of course this is the year 'optical networking' became a household word on Wall Street as investors learned it has something to do with speed, communications and the Internet. Companies with anything to do with optical networks such as Ciena, JDS Uniphase <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: JDSU)") else Response.Write("(Nasdaq: JDSU)") end if %>, and Corning <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GLW)") else Response.Write("(NYSE: GLW)") end if %> are on fire. Ciena basically doubled its share price in the last quarter alone.
At the risk of raining on someone's growth parade, that makes it a much riskier investment based on what it will have to achieve to justify its current price. Investors better understand something about telecommunications products, managing bandwidth, and the competitive landscape before jumping in and adding their money to the pot.
Ciena's chief rivals are Lucent <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LU)") else Response.Write("(NYSE: LU)") end if %> and Nortel <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NT)") else Response.Write("(NYSE: NT)") end if %>, which are going gang busters after the optical networking space. Does Ciena have the legs to win a race against these giant competitors? It does have a big slice of the market, but can it protect its turf in the long run?
Perhaps that's the key. If you have a clear sense that Ciena can build a barrier around its business by differentiating its products and operating super efficiently, you can rest easy -- or at least informed. If not, well, you're one of many hoping for the best.