From II Online. Very positive on CIEN.
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UPDATE: Why Ciena's Recovery is Real
Analyst: Alex Yakirevich (5/26/99)
Since early April, shares of Ciena Corp. (NASDAQ: CIEN - Quotes, News, Boards) have surged more than 50% to a recent $28.13 as investors have come to better grasp the impact of the company's recent acquisitions. We recommended the stock on March 3rd at a price of $25 and continue to be very bullish.
An estimate-beating quarter helped boost the stock. Ciena reported record operating results for the second quarter of fiscal 1999, topping consensus forecasts by a nickel. Revenue grew 11% sequentially, but was 22% lower than year-ago levels. But then again, shares of Ciena fetched nearly $92.38 last July.
Looking past the company's near-term outlook, a period in which many are cautious regarding competitive pressures in the core DWDM (or dense wavelength division multiplexing) market, new product introductions scheduled for the next 12 months should ignite some heady growth.
Over the last few quarters, Ciena acquired a pair of technology start-ups that will play a key role in that new product onslaught. 'The addition of Lightera and Omnia, along with increasing transport offerings makes Ciena a full optical system provider,' says Chris Crespi of BT Alex.Brown. He adds that 'this makes Ciena a player in the coming decades' projected optical buildout.'
Crespi, who rates the stock a 'Buy,' expects the company to earn $0.54 per share on revenue of $710 million in fiscal 2000.
What exactly do Lightera and Omnia add to the table? Prior to acquiring the two companies, Ciena's focus was on enhancing bandwidth capacity along fiber-optic, backbone networks. However, larger capacity was only part of the solution. Carriers also needed control over bandwidth, which would allow them to operate their infrastructure more efficiently. That is exactly the gap Lightera's CoreDirector optical switch fills. This product is intended to directly complement Ciena's bread-and-butter MultiWave Sentry system.
Omnia's AXR 500 system, on the other hand, establishes Ciena's position in the access market. The system is designed to combine various types of incoming lower speed traffic, including voice and data, from local customers into a single high-speed signal that is transmitted to the backbone network. The AXR 500 is intended to complement Ciena's upcoming MultiWave Metro product.
The roll out of Lightera's CoreDirector optical core switch, planned for early 2000, as well as commercial availability of AXR 500, scheduled for the third calendar quarter of this year, are the most significant developments to keep an eye on. These systems should help Ciena to match product offering from the Big Three of optical networking, Lucent Technologies (NYSE: LU - Quotes, News, Boards), Nortel (NYSE: NT - Quotes, News, Boards) and Alcatel (NYSE: ALA - Quotes, News, Boards).
Takeover Candidate
We continue to believe that Ciena remains one of the top acquisition candidates in the telecom sector. We think that Alcatel may be a suitor. Also, pay attention to Cisco Systems (NASDAQ: CSCO - Quotes, News, Boards).
Cisco, which is known for its strategy of acquiring emerging technologies rather than investing in the development of its own, is looking for opportunities in the DWDM space. Currently, Cisco is not meaningfully represented in this market. But judging by recent order flow from RBOCs (regional bell operating companies) and emerging carriers, the marketing is growing quickly.
Recently, Ciena landed two large contracts with Bell Atlantic (NYSE: BEL - Quotes, News, Boards) and BellSouth (NYSE: BLS - Quotes, News, Boards).
To compete head-to-head with Lucent, Nortel, and Alcatel, Cisco has to move fast. Recently, the company invested in the minority stake of Monterey Networks, a manufacturer of Wavelength Routers for optical infrastructure. However, it should not deter Cisco from continued cooperation with Ciena, according to Ciena management.
Paul Silverstein of BancBoston Robertson Stephens notes that Cisco has publicly said it was not going to acquire Ciena. He points out, however, that those comments were made prior to the purchase of Lightera and Omnia, and that perhaps, Cisco's position on the matter has changed.
Bottom Line
In the meantime, Silverstein, who maintains a Buy rating on shares of Ciena, is convinced that the likelihood of a takeover is not by itself a reason to hold the stock. 'Ciena is good at executing and being first to market with cutting-edge technological solutions,' he says. Silverstein also notes that Lightera and Omnia transform Ciena into
an end-to-end intelligent optical network solution provider, which should make the company more appealing among its existing and potential carrier customers. |
