from H&Q Lipton this am:
Expect modest upside: Ciena reports Q4 results at 8:30 am EST this Friday (800-210-9006). We
expect Ciena to continue its rebound and slightly exceed our $142M/0.03 estimate on both the top
and bottom lines. We also believe gross margin will expand slightly beyond 41%. Upside is likely
to be driven by further diversification of the Company's core DWDM customer base and progress
with OC-192 and next-generation systems. We also look forward to encouraging updates
especially for the CoreDirector product (Lightera), but also for EdgeDirector (Omnia).
Holding its own in the core DWDM market: As we have heard in the Lucent ($80.14, LU, B),
Nortel ($84.13, NT, MP), and Sycamore ($240.44, SCMR, NR) conference calls, as well as from
component suppliers JDS Uniphase ($254.44, JDSU, B) and SDLI ($198.50, SDLI, B), the
optical equipment market continues to roll along with remarkable strength and increasing
diversification. We believe Ciena will echo the same sentiments, and is likely to better last
quarter's record of 18 customers. As far as market share goes, according to an RHK study, the
Company's share has eased from 20% in 1998 to 14% in 1999. While Ciena clearly has lost some
share - in-line with our expectation – with an expanding DWDM supplier base, keep in mind that
the RHK study may have overweighted Nortel's share to some extent because Nortel's SONET
ADMs are integrated with its DWDM gear, and the company's DWDM revenue includes an
element of SONET gear.
One of the factors that is a central element of Ciena's resiliency in the DWDM market is the
Company's ability to introduce and manufacture new features and products. To that end, we
believe OC-192 channels are selling as fast as the Company can make them. Also, to meet the
needs of next-generation, ultra long-haul networks with full optical functionality, Ciena has
announced its high-density, ultra long-haul transport system that is similar in vision to Corvis'
and Qtera's products, as well as Lucent's long-standing efforts to commercialize dispersion
managed soliton systems. Overall, despite increasing competition and some element of
competitive noise, we view Ciena as one of the few companies with proven optical technology
and manufacturing capabilities.
CoreDirector gaining traction: Although the Williams/CoreDirector announcement may have
been on the early side, we believe Williams ($27.25, WCG, NR) is committed to this product and
should spend well in excess of the $40M mentioned in the press release over the next few years.
We believe Ciena is among the leaders both in terms of architecture and product availability in
this segment of the market, which is populated by new and emerging competitive solutions from
Cisco (Monterey) ($98.25, CSCO, B), Sycamore, and Tellium. We believe CoreDirector interest
is high and the Company is trialing its CoreDirector systems with MCI WorldCom ($78.94,
WCOM, NR) and Qwest ($35.75, QWST, NR), which could potentially materialize as customers
in 1H:00.
Despite recent run up, valuation still attractive: We remain surprised that Ciena only recently
has begun to approach the valuation of almost anything else with the term “optical” in its business
plan, especially considering the Company's position as a DWDM innovator and the potential of
its emerging product lines, especially the CoreDirector. We reiterate our BUY recommendation
on CIEN shares and expect solid Q4 results. |
