BBRS Silverstein: Key Points:
· For its fourth quarter of fiscal 1999, Ciena reported revenues of $141.4 million and
EPS of $0.03 versus our estimates of $138 million and $0.02, respectively.
· Better-than-expected gross margins of 41%, versus our estimate of 40%, drove the
company's better-than-expected EPS.
· The company continues to broaden its customer base and to lessen its revenue
concentration, shipping to 23 customers--including seven new customers, four of
which have yet to be announced--during the quarter, versus 18 customers in the
preceding quarter, and 14 customers in the fourth quarter of fiscal 1998.
· Demand for Ciena's new OC192, metro DWDM and, most importantly, Core
Director optical switch systems appears to be strong. Core Director is scheduled to
enter six customer trials in January. MultiWave Metro now has four customers and is
in five to ten customer trials.
· We are maintaining our fiscal 2000 revenue and EPS estimates and are initiating
estimates for fiscal 2001.
· We are reiterating our Buy recommendation on the stock.
SUMMARY:
As the following table shows, Ciena reported 1999 fiscal fourth quarter revenues of $140 million and
EPS of $0.03 versus our revenue and EPS estimates of $138 million and $0.02, respectively. Overall
revenues increased by $12.5 million, or 9.7%, sequentially, and increased by $50.2 million, or 55.1%,
year over year.
Table 1
Robertson
Actual Stephens Consensus
Revenues $141.4 $138.0 $140.0
EPS $0.03 $0.02 $0.02
Source: Company reports and Robertson Stephens estimates.
Better-than-expected gross margins drove the better-than-expected increase in EPS. For the fourth
quarter in a row, gross margins increased sequentially, improving to 41.0% in the quarter, up from
38.4% in the preceding quarter and 31.2% in the fourth quarter of 1998.
We believe the quarter offers investors another signpost marking Ciena's ongoing recovery, which
commenced three quarters ago in the January first quarter of fiscal 1999, following the decline in the
company's operating performance during fiscal 1998. A number of data points from the quarter
address in the affirmative lingering concerns on the Street regarding Ciena's ability to effectively
compete and prosper in the face of Lucent, Nortel, and other similar competitors. Showing marked
improvement in the quarter, diversification of Ciena's customer base and attenuation of revenue
concentration continue to head in the right direction. Regarding the former, Ciena shipped to seven
new customers during the quarter including four customers that the company has yet to announce.
Seven different products generated revenue during the quarter, including the fourth generation 96
channel new CoreStream MultiWave (mix-and-match OC48/OC192) DWDM long-haul system,
OC192 blades, the MultiWave Metro DWDM system, and the Edge Director next-generation SONET
Add-Drop Multiplexer. Demand appears to be strong for new products addressing three important new
markets for Ciena: OC192 long-haul, metropolitan DWDM and optical bandwidth management.
The metro DWDM market and optical bandwidth management market represent substantial addressable
market opportunities (amounting to several billion dollars over the next decade, by our estimates) that
are each at the stage of inception. Ciena's product offerings for each of these markets appear ready to
burst out of the starting blocks. Ciena shipped MultiWave Metro to two customers during the quarter,
has announced three customers during the quarter, we believe already has won a fourth customer, and is
in five to ten customer trials. The Core Director optical switch is progressing nicely, with six different
customer trials scheduled to begin in January.
We are maintaining our forecast of Ciena's fiscal 2000 revenues and EPS on the basis of the solid
financial performance during the quarter. We also are initiating fiscal 2001 revenue and EPS estimates
of $1.12 billion and $1.05, respectively. We are reiterating our Buy recommendation on the stock
given the following:
§ The robust and accelerating demand for DWDM systems driven by the on-going demand tornado
for bandwidth as the Internet continues to be widely utilized for information, recreation and
commerce;
§ The continued increase in Ciena's revenues, gross margins, and customer base, and improvement in
revenue visibility; and
§ The expected benefits resulting from the introduction of new products gained from the acquisitions
of Lightera Networks and of Omnia Communications (Core Director and Edge Director) and
developed internally (OC192 long-haul and MultiWave Metro--in short, the transformation of
Ciena from a provider of raw bandwidth for the core of carrier networks into a provider of end-to-end
managed optical transport solutions. We estimate that, together with Ciena's existing OC48
long-haul systems, the four new optical networking segments Ciena is in the process of entering
represent an addressable market opportunity of over $15 billion.
REVENUE/PRODUCT BREAKOUT:
Customers/Revenue Concentration. Ciena continued to grow its customer base, shipping to a total
of 23 customers during the quarter compared to the 18 customers it shipped to in the third quarter of
fiscal 1999 and the 14 customers it shipped to in the fourth quarter of fiscal 1998. Seven of the 23
customers during the quarter represent new customers of the company. Four of these seven new
customers have yet to be announced by the company. Regarding revenue concentration, while three of
the 23 customers each accounted for in excess of 10% and collectively accounted for 46% of Ciena's
total revenues in the quarter, this compares favorably with the three greater-than-10% customers that
accounted for 58% of total revenues in the preceding quarter.
Continuing its trend of attenuating its revenue concentration, three of the 23 customers were 10% or
greater customers during the quarter and collectively accounted for 46% of total sales compared to three
greater-than-10% customers in the third quarter of 1999 that collectively accounted for 58% of total
sales and three such customers that collectively accounted for 71% of total sales in the fourth quarter of
fiscal 1998.
Products/Revenues. DWDM systems accounted for 90% of the company's revenues in the third
quarter with services contributing 10% of total revenues. Demand for Ciena's core DWDM transport
products remains strong. The majority of Ciena's customers are deploying Ciena's 40 and higher
channel count systems, which Ciena has now been shipping for the past six quarters. Demand outside
of North America continues to be very strong as international sales accounted for 63% of total sales in
the quarter compared to 40% in the third quarter.
Ciena's long-haul MultiWave Sentry 4000 (40 channels) DWDM system made the largest contribution
to the company's revenue, although the company noted that its 96 channel fourth generation
CoreStream long-haul DWDM system was close behind and is finding strong acceptance among next-generation
service providers.
Notably, there appears to be considerable customer demand for Ciena's new CoreStream MultiWave
OC192 DWDM system as well as considerable interest in Ciena's new CoreDirector optical switch,
which is scheduled to enter field trials with Williams Communications in the US and Iaxis
Communications in Europe in January, and in Ciena's Metro DWDM system, which shipped for the
first time in the third quarter of fiscal 1999 and now has three announced customers. In addition, the
Core Director, which enables the end-to-end management of traffic within optical fiber networks, is
scheduled to enter into six different customer trials in January and the MultiWave Metro is already in
five to ten customer trials. On the conference call announcing its earnings, management noted its
confidence that the Core Director system will ship on schedule, with field trials in January and
commercial shipment slated for the second quarter of calendar 2000. This conviction stands in sharp
contrast to the cautionary tone taken by the company in its fiscal third quarter conference call when it
warned that there was no further margin for any additional delays in the final stages of development of
the product. Our own conversations with Williams Communications, the first announced customer and
beta site for the CoreDirector, support the company's confidence.
While Ciena shipped the Edge Director, which is a next-generation SONET Add-Drop Multiplexer
which utilizes ATM, to its first customer during the quarter, it appears that it will take several quarters
for this product to ramp. Investors have reason for optimism on the basis of the experience encountered
by ADC Telecommunications with its CellWorx platform, which similarly took several quarters to find
customer acceptance.
Core Director: Management noted that Ciena has lined up six customer field trials (scheduled to
begin in January), including Williams and iaxis, for the Core Director optical switch, which in our
opinion represents the most important product for Ciena's future. Both existing and prospective
customers have expressed significant interest in Lightera's Core Director optical switch platform. As
noted above, the company noted that it is highly confident that the system will begin field trials in the
first calendar quarter of 2000 as planned and to commercially ship for revenues early in 2000.
MultiWave Metro: Ciena shipped to and recorded revenue from two customers for its new
MultiWave Metro DWDM system in only its second quarter of shipment. MultiWave Metro is a ring-based
system targeted for metropolitan area networking (MAN) “collector-ring” and inter-office
applications. The company announced two new customers during the quarter for MultiWave Metro
including iaxis, a pan-European carrier, and Completel, a France-based carrier. In addition, we believe
that Qwest has recently signed on for this product, thereby giving Ciena four reference accounts in the
early stage of what by all indications is shaping up to be a very large market. The company also
announced that the MultiWave Metro is in trials with five to ten additional customers.
CoreStream MultiWave (mix-and-match OC48/OC192) DWDM Systems: The newest family of
core DWDM transport systems, the CoreStream systems scale up to 192 channels of OC48 and 96
channels of OC192 transmission rates. In only its second quarter of shipment, CoreStream already is
approaching the sales level of Ciena's 40 channel system MultiWave systems.
OC192: The company's management noted that there is strong demand for Ciena's new CoreStream
MultiWave OC192 DWDM systems and some, albeit relatively little, OC192 revenues were recognized
during the quarter. The company is in the process of ramping manufacturing to address this demand
and we expect to see a material contribution to revenues in the current first quarter of fiscal 2000 with
full manufacturing ramp completed by the fiscal second quarter. Ciena shipped its OC192 systems to
its first customer during the quarter and noted that it has several additional strong prospects. This new
platform offers Ciena an interesting opportunity to the extent that to date Nortel (NT $43) has virtually
owned the OC-192 DWDM market with approximately 90% market share. Just as carriers that rely on
Ciena's OC-48 DWDM systems not surprisingly seek second source suppliers to lessen their
dependency on and increase their bargaining power vis-à-vis Ciena, so too we would expect Nortel's
current OC-192 DWDM customers to consider alternative suppliers.
International. International sales accounted for approximately $89 million, or 63%, of total revenues
which represents a sequential increase of approximately $38 million compared to last quarter's $51
million, or 40% of total revenue. The $89 million of international sales in the third quarter represents a
substantial increase over foreign sales of approximately $38 million, or 41.9% in the second quarter of
fiscal 1998.
Margins. Following four quarters of dramatic decline during fiscal 1998, gross margins increased to
41.0% during the quarter compared to 38.4% in the third quarter of fiscal 1999 and 31.2% in the fourth
quarter of fiscal 1998. Management attributed this increase to continued stabilization in the pricing
environment in the industry and to the beneficial impact of cost reductions in their products. Over the
next two quarters we expect the company to benefit from continued significant product cost reductions.
Although we note that the DWDM market remains fiercely competitive, once the respective Lightera
and Omnia products begin to ship in fiscal 2000, allowing Ciena to compete on the basis of a managed
end-to-end optical transport solution rather than on the basis of raw bandwidth, we believe that price
will become significantly less important and that Ciena will enjoy a corresponding increase in gross
margins.
ESTIMATES:
We are maintaining our revenue and EPS estimates for fiscal 2000, given the solid operating
performance during the quarter. We also are initiating fiscal 2001 revenue and EPS estimates of $1.12
billion and $1.05, respectively.
1999A 2000E 2001E
New
Revenues(mm) $482.1 $755.0 $1,120.0
EPS $0.09 $0.55 $1.05
Old
Revenues(mm) $478.7 $755.0
EPS $0.08 $0.55
Source: Robertson Stephens estimates and company reports.
BALANCE SHEET:
Ciena's balance sheet suffered some deterioration during the quarter. Accounts receivable DSOs
increased by 20 days to 92 days from 72 days in the preceding quarter as, consistent with
management's guidance at the end of the third quarter, international revenues increased significantly
during the quarter. Foreign carriers typically receive extended payment terms relative to their North
American counterparts. Part of the increase was also due to favorable terms given one particular
customer and competitive pressures. Inventory levels increased by approximately 12 days to 86 days
from 73 days with inventory turns decreasing to 4.2 from 4.9 times as a result of continuing
diversification of the company's customer base and product portfolio. This customer and product
diversification is necessitating a higher level of inventory on hand. The company's net cash position,
including marketable debt securities, increased by roughly $36 million to approximately $262.4
million from $298.3 million in the preceding quarter.
The company's financial performance, as measured by its ROIC, improved modestly during the quarter.
Annualized ROIC was 2.7% in the quarter compared to (0.2%) in the third quarter. Invested capital
was $359 million compared to $334 million in the third quarter while NOPAT increased to $2.3 million
from ($0.7 million) in the third quarter. We expect to see substantial improvement in this metric in
fiscal 2000 once the Lightera and Omnia products begin to ship for revenue and Ciena can realize the
benefits of their synergistic solutions.
ACTION NOW: Ciena is rated a Buy.
THE COMPANY:
Ciena is a leading provider of advanced high-bandwidth fiber-optic Dense Wave Division Multiplexing
(DWDM) systems. DWDM systems are next-generation physical devices used to increase the
bandwidth transmission capacity of fiber optic telecommunication networks by expanding the
bandwidth transmission capacity of fiber optic cables. Ciena's DWDM systems send multiple
independent information streams on different wavelengths, or colors, of light on a single optical fiber.
Each one of these wavelengths is commonly referred to as a channel. By deploying Ciena's DWDM
systems, a telecommunication or network service provider can thereby transmit or carry the same
amount of information over a single fiber that previously required multiple separate fibers. For
example, Ciena's 40 channel DWDM system can carry the same amount of information that formerly
required 40 separate optical fibers. As a result of deploying Ciena's products, service providers can
increase the transmission capacity of their existing networks at a fraction of the cost of laying additional
optical fibers. The principal market for Ciena's products are telecommunication and network service
providers' fiber optic transmission networks.
INVESTMENT RISKS: Among the risks are that Ciena competes against a number of companies
much larger in size and having much greater financial, marketing, R&D and other resources and Ciena
has only a relatively small number of customers, which increases the risk of volatility in the company's
revenues and earnings. |
