August 17, 1998
Shares of Ciena and Tellabs Sink
After Warning on Profit, Revenue
By STEPHANIE N. MEHTA
Staff Reporter of THE WALL STREET JOURNAL
The stock of telecommunications-equipment makers and merger partners
Tellabs Inc. and Ciena Corp. plummeted Friday after Ciena warned of
disappointing fiscal third-quarter profit and revenue.
Ciena, which makes gear that increases the capacity of fiber-optic
telephone networks, also confirmed that some of its profit figures were
misstated in a Tellabs merger-registration statement filed last month with
the Securities and Exchange Commission. Ciena executives said the
company corrected the error, first reported by the New York Times, in an
SEC filing Friday morning.
In Nasdaq Stock Market trading Friday,
Ciena shares plunged $17.0625, or 24%, to
close at $54.125; Tellabs fell $13.6875 a
share, or 19%, to close at $58.125.
Tellabs, of Lisle, Ill., has offered to acquire Ciena in a one-for-one stock
swap originally valued at almost $7 billion. Based on Friday's closing
prices, the transaction would be valued at about $6.3 billion. Shareholders
of each company will vote on the transaction this week.
In a news release, executives of both companies renewed their support for
the deal. "Our business is fundamentally in a very strong position," Patrick
Nettles, Ciena's chief executive, added in an interview Friday. "The fit is
extraordinary." Tellabs didn't return telephone calls seeking comment.
Analysts Praised Proposal
Analysts have praised the proposed combination, which the companies
announced in June. Tellabs makes "digital cross-connect" technology that
helps telephone companies manage their networks, and it wanted to enter
quickly the fiber-optic gear business; Ciena, of Linthicum, Md., had those
systems and gear, but needed access to Tellabs customers.
Ciena's lack of customer diversity, however, has raised some investor
concerns. AT&T Corp. has said it won't deploy Ciena's 16-channel
system, which splits a single strand of fiber into 16 separate streams of
light. WorldCom Inc. also said it will scale back its purchases of Ciena
gear. Ciena faces increasing competition from Lucent Technologies Inc.,
which has announced a system that would split a fiber into as many as 80
channels.
On Friday, Ciena said that net income for the fiscal third quarter ended
Aug. 1 was in the range of 13 cents to 15 cents a share. Analysts surveyed
by First Call had expected the company to earn 32 cents a share. Ciena
said it estimates revenue for the period rose to $129 million from $121.8
million a year earlier.
The company said gross margins were hurt by a discount to a major
customer in exchange for volume sales. Revenue was hurt by the delay of a
$25 million order, Ciena said. The company is in the process of switching
to calendar-year reporting from fiscal-year reporting.
'An Innocent Mistake'
Separately, Ciena acknowledged an error in a Tellabs registration
statement that contained terms of the acquisition. Instead of stating Ciena's
gross profit, the line item contains the company's costs of goods sold for
the six months ended April 30 and the comparable year-earlier period --
thereby understating the company's earnings. "It was an innocent mistake,"
said Eric Georgatos, Ciena's general counsel. He said the company
learned of the error last week and corrected the figures in a filing Friday.
While many analysts still believe the Tellabs-Ciena combination makes
sense, a few questioned Ciena's ability to hit Wall Street's revenue targets.
Some players had predicted Ciena would add about $800 million or more
to Tellabs' 1999 sales.
Given the gear maker's recent revenue growth, "I don't know if Ciena
could [reach] that by itself," said Patrick Houghton, an analyst with Wheat
First Union. "But with Tellabs' sales force, it's still a possibility."
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