Ciena to Merge, Shrink
JUNE 19, 2002
PREVIOUS NEWS ANALYSIS
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Ciena Corp. (Nasdaq: CIEN - message board) says its planned merger with ONI Systems Inc. (Nasdaq: ONIS - message board) is set to close Friday, June 21. But when earnings are announced August 22, the combined company will likely fare worse than Ciena did by itself last quarter (see Ciena & Oni OK Merger, Warn ).
Ciena CEO Gary B. Smith told analysts on a conference call last night to expect earnings to be "down" instead of "flat to down" from a level of $87.1 million last quarter (see Ciena Looking to Merge Away Misery ). ONI Systems reported net first-quarter revenues of $21 million in April, with a net loss of $35.9 million (see ONI Reports Q1 Results ).
As a result, Ciena's cutting headcount and consolidating sites. But analysts say these measures may not be enough to ensure a return to profitability, even next year.
Ciena is terminating 335 employees, roughly 11 percent of the combined workforce, before and shortly after the merger, bringing total headcount to 2,600. About 145 of the staffers terminated yesterday are from ONI Systems, and about 80 from Ciena, sources said. Another 110 are due to be cut in three months
Ciena's already chopped 30 percent of its staff to date. And, while no further cuts are anticipated, Ciena execs told Wall Street analysts on a conference call last night that they're willing to continue to size the company in line with market requirements.
Regarding facilities, Ciena is closing its metro switching headquarters in Fremont, Calif. (a site gained from its acquisition of Cyras Systems last March) and will move all combined metro transport and switching efforts into a new Metro Products Group at ONI Systems headquarters in South San Jose, Calif. As previously announced, Rusty Cumpston, ONI's present COO, will take over leadership of the new group (see Ciena and ONI: Wedding of the Year? ).
Ciena says no other management changes are expected. Hugh Martin, ONI's CEO, has been expected to leave officially once the merger is stabilized.
Ciena's clear that it's not done consolidating facilities. "We haven't talked more about anything else. We are looking into it," said CFO Joseph Chinnici last night. "But we need to finish our review and tell people involved before they hear it on a conference call."
Ciena execs say the ultimate earnings outcome in August depends on whether pending sales, such as one international CoreDirector win worth about $20 million, come to fruition in time for the quarterly report.
While lamenting the state of the telecom market, CEO Smith waxed optimistic on the "medium- to long-term future," making the following key points:
Ciena's focused internationally. International PTTs, not North American incumbents, represent the best opportunities for Ciena over the next several quarters, Smith said. He expects some big deals with international incumbents to materialize in 2003.
No dramatic recovery expected. "The next year to 18 months are not likely to represent a recovery in the true sense of the word." But Smith thinks carriers can't go on holding their wallets shut much beyond that.
Long haul is forever changed. The prospects for long-haul products have "changed forever" as a result of the downturn. But it's "too soon" to tell exactly which of Ciena's products are set to do better than others.
Analysts have mixed feelings about all this. Most say Ciena's stock is likely to fall, and though they remain optimistic on the company's future prospects, nothing's going to happen very quickly. "The bottom line is that our concerns about Ciena's valuation and the likelihood of the stock edging lower certainly seem warranted," writes Steven Levy of Lehman Brothers in a note today. He's maintaining a Market Perform rating on the stock, even though it's apt to dip significantly next year, in his view.
Levy's also hedging his bets on the contribution of future wins. "We continue to believe Ciena is looking at some potentially huge, multi-hundred million dollar awards around the globe which could generate noticeable new sales in 2003," he writes. But the ramp-up in revenues is likely to be slow or uneven.
Some analysts worry that Ciena's not cutting enough, and that its international strategy isn't likely to help save money. "We remain concerned that the operating expenses remain too high, given our expectations for the sales level. We reiterate our Sell/Reduce rating," write Simon Leopold and Tal Liani of Merrill Lynch & Co. Inc.
At press time, Ciena shares were trading at $4.05, down $0.35 (7.93%). ONI shares were trading at $2.88, down $0.21 (6.80%).
— Mary Jander, Senior Editor, Light Reading
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