To Greg, and the Thread, FYI, Re: CIEN, my new enthusiasm.
<<<Ciena's Second Act
By Alec Appelbaum
HAVE YOU GOTTEN fiber-optic fever? Loaded your portfolio with JDS UniPhase (JDSU) and sprinkled in SDL (SDLI)? Followed Nortel Networks (NT) and decided to wait patiently until Lucent Technologies (LU) recovers from earnings woes? Splendid. But you should really get to know Ciena (CIEN), which has missed the spotlight, if you're going for full optic immersion.
CEO Patrick Nettles
Ciena makes software and hardware that phone companies use to carry light waves along their new and existing networks. It appeared as a scapegoat in most investors' lives in August 1998. Ciena's aborted merger with Tellabs (TLAB), which makes gear for connecting traditional networks with new optical ones, torched some of the tautly drawn bets at Long-Term Capital Management and ? along with the financial crisis in Asia and Russia ? ushered that firm into Wall Street's burn ward. Ciena's stock tanked in the following months as investors began viewing it as a symbol of uncertainty. Since then, they've grown more confident. On Oct. 26 of last year, Ciena passed the S&P 500 index in gains since Aug. 31, 1998. Since then, it has broken away. Its stock climbed 252% in the last 52 weeks, while the S&P gained 5%.
Now Ciena is testing a new product, the CoreDirector, which aims to let networks deliver traffic without big, expensive machinery. This product could give the company a high and distinctive profile. Nortel and Lucent are still building their optical arsenals through acquisition, which gives Ciena a chance to win major customers before the bigger companies can lure them. "Lucent is struggling to get optical stuff out. Ciena is shipping," says George Peabody of the Aberdeen Group, a market-research firm that has consulted for Ciena. CEO Patrick Nettles says the company decided to "focus on its knitting" after the Tellabs merger went kaput. Now, with his company's stock surging, he wants to stay independent to reap the rewards. We chatted with Nettles this week about keeping up in the suddenly torrid optics market.
SmartMoney.com: Are you surprised by how the market for optical stocks has taken off, and how do you see your role in it evolving?
Patrick Nettles: We thought the market was going to do pretty much what we're seeing ? we're very pleased that we've done the job we have [since the Tellabs merger fell apart]. This market has a long way to go. It is a very fast-moving market where decisions are made more quickly than the telecom industry has traditionally shown. The nimbleness that a smaller company has is one of our benefits. And the infrastructure we have built [within our company] is absolutely crucial to successful implementation.
SmartMoney.com: What are the important issues for you right now?
PN: I think the issues right now are keeping focused on developing and testing the product [CoreDirector]. We expect that we'll have substantial deployments in the second half of the year. Its feature sets address the deliverability of new [Internet] services. It's the first scalable solution to deal with a [all the services the Internet can carry] ? as bandwidth explodes, so have carriers' costs.
SmartMoney.com: How do you differentiate yourself from other companies making gear for optical transmission, such as Juniper Networks (JNPR)?
PN: Juniper is complementary in that they process the information that flows through our pipes. But [more generally,] the question is open yet with new companies whether they can get in place sufficient infrastructure. We spent more than five years getting to this point. We have reached scale in terms of our ability to test products and the development teams that are required [to win customers].
SmartMoney.com: That's a function of your ability to build a big company?
PN: Yes. The fourth generation of our transport products, and every generation, has seen significant improvements. The ability to support it in the field and deliver products to newer carriers with fairly limited resources are things we [can] deal with. Having a better mousetrap and the infrastructure [of a large company] succeeds where just having a better mousetrap might fail.
SmartMoney.com: How do you see consolidation in this industry playing out?
PN: We've got plenty of room to build a meaningfully larger business over the next several years. We're getting to be on the same scale [in those areas where we compete] with Cisco Systems (CSCO) and Nortel Networks (NT). Acquisitions remain attractive for companies in this space, including us, because there's been a great deal of investment in young startups that may not all remain [viable]. We see a great advantage in our ability to relate directly to customers that we deal with. We don't see that there would be a great advantage for us in being taken over.
SmartMoney.com: What are some of the important metrics for investors to watch to see if you're delivering on your promises?
PN: It's clearly important to demonstrate the continued ability to win. Wins will tend to be smaller pieces as we move [our products] closer to the edge of the network. But there are still a few large deals out there. [Ciena announced a new telephone-company customer last week, but did not disclose the customer's name.]
SmartMoney.com: Do you see your valuation as reasonable relative to the valuations of other optical players?
PN: On relative valuations, I can say there are great disparities in this market. While it's been comforting to get some attention over the last ten weeks in our stock, it's evident that investors are responding in a different way to young companies with stories that are pure and unblemished because they're untested. There's another set of companies being treated with great respect because they've got a long track record, and that's admirable. Those of us in between are in the process of building our track record. >>> |
