Part 2 Of What We Learned From Visiting CIEN
BaltimoreFundMgr
(45/M)
Nov 3 1998 1:28PM EST
Our Take--
Ignore the takeover talks and focus on the fundamentals. The picture that clearly emerges when spending time with the company is that CIEN enjoys considerable competitive advantages in a fast growing market, while its equity continues (even with this run-up)to trade well below historical and peer group norms.
The competitive advantages are not inconsequential--CIEN has superior R&D and manufacturing expertise, having beaten its customers to market in 5 different DWDM systems. For a start-up to surpass a well-heeled competitor to market just once is a notable achievement--to do it 5 times suggests superior R&D, possibly of world-class level.
Yes, it is true that more competitors are announcing 40 or more channel systems; but CIEN still has the only 40 channel system that is actually being deployed in the field by a service provider. This puts to rest, to all but those in denial, the fear that CIEN is losing its technical edge. In our opinion, the possibility is quite high that many of the competitors will not live up to their press releases in an acceptable time frame. The only accurate measure of technology lead is product deployment and its timing--and on both scores, CIEN maintains an enormous lead.
Also note that CIEN appears first to market together with Cambrian Systems (a Newbridge Network unit), a ring-based product optimized for the Metro area networking market. Excepting Ericsson, no established vendor appears close to addressing this enormous market.
We were also made privy to 3 new products scheduled to ship in '99. I will not go into detail; suffice it to say at least one of these will gain a great deal of attention when unveiled.
As an indicator of the company's renewed confidence, you should be aware they have resumed expanding their sales and marketing organizations, and have, to our eyes, a very enthusiastic and rejuvenated employee base.
Final thought on valuation--when you deduct $2/share cash, CIEN's technology is valued at $2b. Compare that to LU paying $1b for Yurie Systems (which has a fraction of CIEN's revenues) or Alcatel paying $350m for Packet Engines (a start up with no revenue), or to several private DWDM start-up ventures receiving private market valuations in the hundred's of millions--despite having no revenue and an unproven technology. In that context, CIEN's current valuation is not lofty.
As CIEN announces new products and customer wins, expect the market to take notice and likely continue to revalue the equity at increasingly higher levels.
Sorry for the lengthy post. I will now go underground and do not intend to resurface unless there is a major development (assuming these long posts are welcome).
Good Luck All!
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