While we still expect Ciena to grow 40 (percent) to 60 percent faster than the optical systems market, we believe the market will decline in 2001 and remain flat in 2002," Merrill Lynch analyst Michael E. Ching wrote earlier this month.
"It is now clear to us that no matter how good a product is, it is unlikely that market share gains will be enough to offset the market declines. Once Ciena works through some of their recent contract wins we expect the company to experience some of the same problems that are plaguing the other optical system suppliers."
However, Ciena hasn't stumbled this year yet. As Ching noted, the company continues to win big contracts.
It's not hard to see why Ciena continues to top analysts' earnings estimates, if you believe Robertson Stephens analyst Paul Silverstein.
"While the investment community has expressed increasing concerns regarding Ciena’s ability to sustain its gross margins, we believe--absent a shortfall in revenues--a significant decline in gross margins during fiscal 2001 and 2002 is not necessarily a given," he wrote.
He argues that Ciena's competition remains scant, so there are no price wars to ravage margins. "Pricing pressure in the particular segments of the optical industry in which Ciena competes is relatively more benign--which is not to say that it is benign--than those segments to which Nortel (Networks) and Lucent (Technologies) have the bulk of their exposure," Silverstein said.
If anything, margins could improve because the companies that sell parts to Ciena and its peers have too much inventory, he said. Ciena should be able to squeeze cheaper prices from its suppliers, Silverstein said. "These concessions (from component suppliers) could offset most, if not all, of any pricing concessions that Ciena finds itself providing its carrier customers," he wrote.
In the end, the optical technology of a Ciena or an ONI Systems simply is more important than other communications equipment, proponents will argue.
"Can carriers still afford optical switches? Our checks indicate that spending on optical switches remains a priority for most carriers," said a recent Morgan Stanley report investor.cnet.com |
