Ciena Near a Big Switch Sale to Williams
By Scott Moritz
Staff Reporter
8/2/00 6:48 PM ET
Pat Nettles has stood on the brink of victory before. So even on the eve of a major coup for Ciena (CIEN:Nasdaq - news), the networking-equipment supplier's chief executive isn't wasting time beaming.
Flip the Switch
Ciena
Ciena Chief Pat Nettles
Ciena is a few months from nailing down a major contract for CoreDirector, its hot new optical-switching product. Williams Communications (WCG:NYSE - news) has tested the product, which is designed to serve as the brains of new communications networks, and likes what it sees. That means Williams will likely buy 30 to 40 of these switches, valued at around $1 million each, this fall to outfit its nationwide fiber-optic network.
The deal won't be huge in dollar terms, but it could serve as a major endorsement for this industrious also-ran of the hot telecommunications-equipment market. That could mean big things for Ciena stock, which has already gained more than 300% over a year and recovered from a sharp dive two years ago. All the same, Ciena's heady valuation and a broken 1998 deal that cratered the stock give Nettles, and shareholders, plenty to think about.
Centerpiece
Today's installed electronic network switches are straining to manage the torrent of traffic coming from the Internet, corporate data pipes, wireless calls and the like. Optical switches have long held the promise of helping network operators keep up with the flow and allocate the bandwidth more efficiently route the traffic. With so much riding on the expansion of telecom bandwidth, investors have been betting big on companies that can make networks faster.
"This is really an important market," says analyst Dana Cooperson, an analyst with South San Francisco, Calif., consultant RHK. Cooperson projects total sales of optical switches will hit $2 billion by 2003. "These switches are going to be the center point ... to the data networks of the future."
Back From the Abyss
Ciena shares rebound amid optical-networking froth
Source: BigCharts
Accordingly, competition in this potentially lucrative market is fierce: Outfits such as Sycamore (SCMR:Nasdaq - news), Tellium, Cisco (CSCO:Nasdaq - news), Nortel (NT:NYSE - news), Alcatel (ALA:NYSE ADR - news) and Lucent (LU:NYSE - news) have been developing various optical switches, and seeing their stock rocket as investors bet on the Internet-equipment lottery. Ciena has held its own, winning kudos from the telco crowd for its CoreDirector product.
'Vendor of Choice'
"Right now, based on the performance we have seen to date from all the vendors, Ciena is our vendor of choice for the initial contract for switches," says Andy Wright, chief technologist for Williams' optical networking unit.
Wright cautions that any order won't become final until this fall, when Williams expects to make a formal contract announcement. But rarely does a customer tout a product so openly before a deal is struck. (Then again, Williams has some mending to do, since some of its people were quoted in a recent Wall Street Journal story saying Ciena's software was buggy.)
Optical rival Sycamore, which is also eagerly vying for the Williams contract, recently sold a competitive optical device for future use in the fiber-optic network being built by 360Networks (TSIX:Nasdaq - news). But in this hotly contested field, Ciena's deal with Williams suggests its product is further along in development.
The Big Bet
For Ciena, the deal represents a quick return on a recent investment. Ciena acquired the CoreDirector switching technology through its purchase of Lightera last year, and the product is expected to show its first revenue later this month, in Ciena's scheduled Aug. 17 third-quarter earnings announcement.
With the telecom-gear market expanding rapidly, Ciena's having no problem growing. For its fiscal year ending Oct. 31, Ciena is expected to earn $1.05 a share, up 43% on a year ago. Revenue should jump 55% to $750 million. Next year, CoreDirector revenue is expected to hit $200 million, according to a J.P. Morgan report.
But with the stock valued at $19.5 billion following Wednesday's 4% decline, there's plenty of risk for shareholders. Though some 25% off its March high, Ciena is up more than 10-fold from its 1998 low and now sports a trailing price-to-earnings ratio of 844. And Ciena followers remember risk.
The Last Time
In 1998, Ciena was a brash optical start-up that commanded a lead in wave division multiplexing, or WDM, technology, which splits light waves into various colors, multiplying the number of information channels on a strand of fiber. The technology made small pipes large, a breakthrough at a time when networks were just beginning to buckle with new Net traffic.
They were heady times, and this little-known Linthicum, Md., company was about to be propelled into the big leagues by winning a critical contract with AT&T (T:NYSE - news) and completing a $4 billion merger with Tellabs (TLAB:Nasdaq - news).
As fate had it, though, AT&T changed its mind and Tellabs ditched the merger. Ciena's stock lost some 90% of its value in a matter of months, plunging into the single digits.
But the company gradually worked its way back into the Street's good graces, capturing third place in the key optical-transport gear market (behind biggies Nortel and Lucent) with sales to the likes of WorldCom (WCOM:Nasdaq - news) and Qwest (Q:NYSE - news). And then came last October's onset of the telecom-infrastructure craze, which drove telecom stocks of all sorts through the roof, carrying once-forgotten Ciena along for what's been a hair-raising ride.
Stronger
Nettles says Ciena has learned from its near-death experience of 1998 and is ready to capitalize on whatever gains it makes now. "We are a stronger company on many fronts today because of what we went through in the past," says Nettles.
But if the executive is excited about the prospect of kicking some competition butt, he certainly isn't showing it. "It's not about one customer and one contract," says Nettles. "Williams is an important customer. We have seven customers in trial, and they are one of them.
"But over the long term, it's who has the customers and who keeps those customers satisfied."
thestreet.com
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Should help it some tomorrow.
Jack |
