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Ciena warnings have familiar ring
Limited customers, Lucent threat mean big risks
By Darren Chervitz, CBS MarketWatch
Sat Feb 21 16:23:08 1998
NEW YORK (CBS.MW) -- Shell-shocked investors pummeled Ciena's
stock Friday after learning that one of the two major customers for the
fiber-optics technology company planned to scale back orders.
With 22 million shares changing hands, the stock fell nearly 30 percent to
42 3/8 -- its lowest point since last May. According to Salmon Bros.
analyst Steve Levy, the warning about the customer was "a bolt out of the
blue."
Yet, other analysts say cracks in Ciena's compelling investment story had
been emerging for quite some time, and alert investors perhaps could have
seen this coming.
For those who aren't aware, the technology used in Ciena's products,
called Wave Division Multiplexing (WDM), allows telecommunication
companies to send more data over their fiber-optic networks by dividing
each strand of fiber into multiple channels. Thanks to tremendous growth
in the transmission of digital data, especially via the Internet, the market
for this technology was expected to grow 78 percent a year.
Ciena, which was the first company to offer this technology with a product
that divided fiber strands into 16 channels, was primed to take advantage
of this growth. The problem was that Ciena only had two customers when
it went public in February 1997, WorldCom and Sprint. It's since picked
up a handful of other customers, but virtually all of the company's 1997
revenue came from those two original customers.
So, it's no surprise that investors reacted strongly when the company
announced that Worldcom, which is trying to get its multibillion-dollar
merger with MCI approved, will start purchasing bandwidth on a more
conservative, just-in-time basis.
"All indications were that Worldcom couldn't get enough bandwidth ...
This really took a lot of people by surprise," Salomon's Levy said.
Yet, Ciena has always warned that the urge to merge in the
telecommunications industry could have a dramatic impact on how its
customers purchase equipment. "WorldCom's information in February
indicates there can be surprises as network operators and their purchasing
groups grapple with unprecedented changes and challenges to network
planning," the company says in its fourth-quarter filing with the Securities
& Exchange Commission.
Meanwhile, the folks at Ciena say they can still meet analysts' 1998
revenue estimate of $600 million by getting more money from other
accounts, including AT&T, which is currently testing Ciena's technology.
Gurinder Parhar, an analyst at Toronto-based Canaccord Capital, is
doubtful. "I respect their assumptions, but I don't think they'll make it,"
said Parhar, who's reducing his 1998 revenue estimate by $30 million.
The main problem for Ciena, according to Parhar, is that rival Lucent
already has locked up many of the limited number of WDM users.
According to Kathy Szelag, director of optical networking for Lucent, the
company has 20 customers, three of which will be publicly announced in
mid-March.
AT&T is one of those customers, and Ma Bell has already committed to
testing Lucent's next-generation WDM product, which will divide fiber
strands into 80 channels. Lucent said last month that the product will be
ready by the end of the year, and Szelag reaffirmed that schedule. "We
don't expect to have it out by then, we will have it out," she said. "Our
jobs are on the line and we have customer commitments."
Parhar said the Lucent announcement of the 80-channel product was a
great strategic move likely to keep some service providers from "making
immediate purchase decisions for WDM in order to evaluate the new
offering."
In addition, Parhar said many service providers may find it easier
shopping at Lucent, which offers a wide range of telecommunication
equipment, than buying the limited products available at Ciena.
"Ciena has smart people, but they're still only about 900 people. Lucent
has 24,000 people just in its R&D department," Parhar said. "(Ciena's)
scrambling right now."
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