Ciena's Management Miscalculates -- 11:00 AM EST
by Seth Martin
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It took less than two months for Ciena [CIEN:Nasdaq] to go from one warning to another. Ciena said early Tuesday that declines in sales and increases in losses in the Q1 would be much steeper than expected. As the stock appears to be bottoming we are maintaining a Hold rating, but see little chance for accumulation given the mistrust in management that this warning has bred in the investment community.
Ciena warned that sales in Q1 will be $160m, down 56% sequentially and well below the $220m-$257m range the company guided toward just two months ago. Losses, excluding amortization and restructuring charges, are now expected at $0.19-$0.24 per share, versus a previous estimate of $0.08-$0.12 per share in losses. Ciena also announced the reduction of staff by 12%, or 400 employees, also resulting in the closing of one R&D facility.
Given the amount of telecom network expansion over the three years, the current economic slowdown, and the resulting reduction in capital spending by telecom network builders and operators, this is not so surprising. What is surprising is that Ciena's management could walk into this quarter believing that spending, while depressed, would be maintained by certain customers whose ability to spend has clearly been hindered by massive layoffs and plant closings.
In preparation for more of this bad news, the company also said its Q2 sales could be flat to down from Q1. We also are concerned that sales of the CoreDirector optical switching platform could be flat or decline this quarter after the company said in December that sales of the high-end core network product would be up sequentially. Sales of the product grew 60% sequentially in Q4 and made up 23% of revenue. It should be making up a much larger percentage in Q1 and by 2003 should be the chief bread-winner for Ciena.
At 1.45x current book value (versus 4.8x for Cisco [CSCO:Nasdaq]) and 3.2x expected 2002 sales (versus 7.2x for Cisco), Ciena is at levels that are more apt for a slow-growth business - not optical switching. Of course, until the market for switching products recovers and Ciena is again able to turn a profit, it does not deserve to trade at higher multiples. And this warning is a blemish on management's record it won't be able to erase even with increasing caution in the quarters to come.
Market Timing From the Technical Desk
On Dec. 13, we said: "CIENA is currently testing the lower end of a basing pattern at $15.25. The long-term outlook remains positive even though this consolidation may continue for some time. A close under $15.25 however, changes our short-term outlook."
CIENA violated the $15.25 support and is looking to test the recent lows. It took a down gap on Feb. 5 and tested the Oct. low at $9.07, but that support is holding so far. A rebound here will take shares back up to $11.75. However, further weakness calls for a move to $8.50 in one to two weeks.
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