Ciena Sees Tough Times for Telecom -- 11:00 AM EST
by Seth Martin
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Ciena [CIEN:Nasdaq] reported Q1 results that fell within lowered guidance but warned on its Q2 as major customers in the telecom space have dramatically scaled back spending. Our negative rating remains, as this Q2 warning could spell trouble for the optical switch maker's acquisition of ONI Systems [ONIS:Nasdaq].
Ciena reported a Q1 loss of $0.22 per share, in line with its guidance for $0.17-$0.24 per share in losses, though it was above the $0.20 average estimate. Sales of $162.2m (down 56% sequentially) topped company guidance of $160m, though were below average estimates. Gross margins were 13.9% versus 45.5% last year and 39.7% in the Q4:01. One of the largest difficulties for Ciena is that despite declines in expenses in the Q1 over the Q4:01, R&D, Sales, and General & Administrative costs are all still higher than they were in the year-ago quarter. Lowering these expenses to match lower revenues is a significant challenge within the framework of a burgeoning business that relies on technological breakthroughs (and hence lots of R&D spending).
Ciena added two new customers this quarter for a total of 60. While this is a deceleration from previous quarters it's still a positive sign within a weak market. The company also noted a major sale of its CoreDirector optical switching platform to AT&T [:NYSE] and the strong prospects for that product later in the year.
That, however, was overshadowed by management's announcement that "two of our historically most important customers may purchase significantly less from us than they had previously indicated." Difficulties for Sprint [FON:NYSE] and Qwest [Q:NYSE] have been well publicized of late, and with these two services providers historically representing half of all Ciena sales, it would appear that these are the culprits. Additionally, Ciena noted that, in general, customer deployments are being delayed.
Consequently, Q2 sales are expected at $100m this quarter, down another 38% sequentially, below average expectations of $148m, and reaching their lowest level since Q1:99. The loss next quarter is currently estimated on average at $0.18 per share according to First Call, but will rise by at least $0.05-$0.06 per share on this expected sales slump.
All this follows Ciena's announcement at the beginning of the weak that it will buy ONI Systems for about $870m. Keep in mind that the deal still requires shareholder approval, and price action in shares of Ciena may have a major impact on the health of this deal. Our negative rating comes in light of poor near-term telecom equipment market conditions and the fact that the stock trades at 4.5x expected 2002 sales and will not see earnings per share for 6+ quarters.
Market Timing From the Technical Desk
On Feb. 20, we said: "Ciena [CIEN: Nasdaq] hit a new 52-week low on Feb. 19 and hit our downside target of $8.50. There is no sign of a bottom yet. Further erosion is possible to $6.75."
We reiterate our previous stance on Ciena. Shares are trading at $8.13.
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