Hambrecht & Quist comments on the announcement today......
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Company: CIEN Corporation
Price: 26.81
Recommendation: HOLD
Notes: f
Firm: Hambrecht & Quist
Date: 3/15/99
Estimates Q1 Q2 Q3 Q4 FY
1998 0.38 0.29 0.15 (0.03) 0.79
1999 0.02 0.03 0.08 0.15 0.28
2000 0.19 0.20 0.21 0.22 0.79
52-Week Range 8-92 ** Market Cap 2,251
Shares Out 108 ** Book Value $4.46
Net Cash/Share $2.64 ** 3-Year EPS Growth 40%
CY99 P/E-to-Growth NM ** FY Revs 498
CY EPS 0.43 ** CY P/E 62
Ciena to Acquire Lightera And Omnia for $980M In Stock
Ciena announced it will acquire Lightera and Omnia. We believe these additions
will greatly extend the functionality and improve the economics of Ciena's
current DWDM products. Although we expect near-term dilution, we expect these
transactions to clearly strengthen Ciena's position as a leading supplier of
complete optical networking solutions. In the longer-term, we believe these two
acquisitions significantly improve Ciena's competitive position and prospects.
Given near-term risks and uncertainty in Ciena's story, we maintain our HOLD.
Overview: Ciena today announced it will acquire Lightera Networks and Omnia
Communications. Ciena's current DWDM products greatly increase the capacity of
long-haul point-to-point networks. The Company's upcoming metro product, which
we expect to begin shipping in Q3:99, extends DWDM into the metro area. However,
these products are limited in terms of flexibility and functionality on the
backbone, and the ability to cost effectively aggregate access traffic. We
believe the addition of Lightera and Omnia fill these gaps. Although we expect
these transactions to be dilutive in the near-term, we expect them to clearly
strengthen Ciena's position as a leading supplier of complete optical networking
solutions in the longer term.
Transaction terms: Both transactions will be accounted for as pooling of
interests. Ciena will pay 20.6 million and 16.0 million shares of common stock
for Lightera and Omnia, respectively. Based on Friday's closing price, this
values Lightera at $552 million and Omnia at $429 million. There are no collars
on either deal. Ciena expects the Lightera transaction to close in the
March/April timeframe, and Omnia in the June/July timeframe.
Lightera: Lightera supplies optical switching products for transport
applications. Current long-haul DWDM systems allow carriers to combine multiple
signals (usually SONET) onto a single fiber, greatly increasing capacity.
However, DWDM products are limited in terms of protection, restoration,
provisioning, and network management. Lightera's products provide this
additional funtionality. The Company's main product, the LightWorks CoreDirector
intellegent optical core switch is a high-density (640 Gbps in a single bay,
expandable to 48 Tbps in service) product that can provision capacity in a very
granular fashion (down to STS-1, or 51.8 Mb/s). Additionally, Lightera has
developed a sophisticated software operating system, called LightWorks OS, that
allows the switches to communicate, and also enables the carrier to dynamically
allocate bandwidth and deploy the switches in a variety of configurations.
Lightera expects to begin lab trials (we believe with Williams) in July with
beta trials beginning in September 1999, and general availability in Q4:99 or
Q1:00. We have been tracking Lightera since early 1998, and view the Company's
team, architecture, and products very favorably.
Omnia: Omnia supplies bandwidth aggregation products for access applications.
DWDM provides massive amounts of bandwitdth. However, the economic benefits of
this bandwidth cannot be fully realized unless lower speed access traffic of
different types can be aggreagated cost effectively. Omni's products provide
this functionality, enabling local service providers to aggregate different
types of data and voice traffic (e.g., T1, T3, POTS, 10/100 Ethernet). Omnia is
currently in lab trials and expects beta trials and general availability in
1H:99.
Estimates and recommendation: Net of transaction costs, management expects these
acquisitions to be dilutive in FY:00 and accretive in 2H:00 (fiscal). Our
current estimates are: $488M/0.28 for FY:99 and $698M/0.79 for FY:00. We are in
the process of quantifying the effects of the acquisitions on our financial
model. Preliminarily, we project our FY:99 estimate to go to $488M revenue and a
slight loss (net of transaction costs), and our FY:00 estimate to go to
$725-750M revenue, and 0.70-0.75 earnings. We plan to revisit these estimates in
the next week. In the near-term, we remain cautious but positive about Ciena's
prospects. Given near-term risks and uncertainty in Ciena's story, we are
maintaining our HOLD recommendation. However, in the longer-term, we believe
these two acquisitions, especially Lightera, significantly improve Ciena's
competitive position and prospects.
CIENA supplies dense wavelength division multiplexing (DWDM) equipment, which
increases fiber capacity for long-distance and local exchange carriers. CIENA's
DWDM solutions include the MultiWave and MultiWave Sentry long-haul transport
systems, MultiWave Firefly and MultiWave Metro short-haul systems, and
WaveWatcher network management software.
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