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By JOHNATHAN BURNS Of DOW JONES NEWSWIRES
NEW YORK -- Fiber optic systems maker Ciena Corp. (CIEN) proved Thursday that even bad economic times can come with a silver lining.
The Linthicum, Md., company beat Wall Street's fiscal year 2001 first quarter earnings estimates by three cents a share before market open Thursday and then raised financial guidance for the ongoing second quarter and full year.
Ciena's positive earnings and revenue projections came after an A-list of names in the fiber optic sector warned of near-term softness in demand as chastened telecommunications carriers trim their spending during an economic slowdown.
However, Ciena officials said the slowdown in carrier spending is not being accompanied by a slowdown in demand from consumers for high-speed Internet and data services.
So carriers are spending less on legacy voice-based switching equipment and are instead focusing on gear that more efficiently routes data traffic.
"The problem carriers have got is carrying data traffic over voice networks," Ciena's Chief Operating Officer Gary Smith told Dow Jones Newswires. "And there's a group of well-funded carriers who see this (economic downturn) as an opportunity to take market share while raising the barriers to emerging service providers."
The growth in telecommunications carrier spending is expected to slow in the first half of the year as a number of start-up phone companies encounter difficulty raising funds to build their respective networks.
Smith and other Ciena executives believe the slowdown in overall spending has made carriers redirect their spending toward high-tech boxes that use optical technology to efficiently route telecommunications traffic.
"We've been evangelizing this for a while," Smith said. "In a more constrained capital market, the carriers are looking more carefully where they spend their money."
That has only helped Ciena, which as a relatively new equipment provider has exclusive exposure to next-generation switching.
In the first quarter ended Jan. 31, Ciena reported revenue of $352 million, a 130% increase over last year's $152 million. Net income, excluding payroll tax on stock option exercises, was $54.1 million, or 18 cents per share.
Ciena raised second quarter earnings guidance to between 15 cents and 17 cents a share, from the previous First Call estimate range of 10 cents to 15 cents. Additionally, Ciena said full-year 2001 earnings per share, excluding items but including the dilution from its acquisition of privately held Cyras Systems Inc., will be between 73 cents to 75 cents. Analysts had expected the company to post earnings per share of 66 cents for fiscal year 2001.
Ciena said revenue for fiscal 2001 will be between $1.67 billion and $1.76 billion, about $175 million higher than previous expectations.
Ciena's projections helped push the entire fiber optics sector up, with the company's stock leading the way, recently trading up 20.6%, or $15.81, to $92.63, with almost 26 million shares swapping hands compared to the daily average of 15.8 million.
One of the main drivers of Ciena's valuation in the past year has been its intelligent optical switching device CoreDirector, which accounted for 10% of revenue in the first quarter. Ciena expects CoreDirector to maintain that share of revenue as the company exits 2001.
Ciena added a third CoreDirector customer in the first quarter, bringing the total number to 10.
"(This bolsters) our view of Ciena as the Number One player in the emerging core optical switch market," wrote Tim Savageaux, analyst with WR Hambrecht & Co. "This is a market that is routinely forecast to total over $10 billion in the 2004 timeframe."
Ciena's sales were driven by strong performance across its long-haul Dense Wave Division Multiplexing transport product line, which accounted for almost 80% of first-quarter revenue.
Ciena's products split light into its different colors and transport telecommunications traffic at high speeds down each wavelength.
Ciena said its average days of sales outstanding decreased to 64 in the first quarter, from 78 in the fourth quarter of 2000. The company expects that number to return to a more normal level, between 70 days and 90 days.
Savageaux, who has rated Ciena a buy, raised his 12-month price target Thursday to $120, from $100. He cited the improved guidance and the as-yet-undisclosed addition of several major customers as a near-term catalyst.
Chief Operating Officer Smith said the company has not announced customers who are involved in building networks across Europe.
Meanwhile, financial analysts were amazed that Ciena's growth projections could fully offset the 20-cents-a-share dilutive effect of its Cyras purchase.
"Ciena reported an almost perfect quarter this morning with strong top and bottom results that exceeded expectations and a strong outlook," Raj Srikanth, optical analyst with Deutsche Banc Alex. Brown, wrote in an afternoon note. "Ciena is emerging as the potential leader in the next-generation optical network sector with its product and technology lead over the competition."
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