CIEN News_Posted: 9:00 p.m., EDT, 9/16/98
After Tellabs deal dies, Ciena focuses on WDM delivery
By Loring Wirbel
LINTHICUM, MD. - Ciena Corp., the wavelength-division multiplexing (WDM) specialist that for two years could
seemingly do no wrong, has been through three weeks of a hell that most newly public companies only have
nightmares about. Just as its shareholders were about to approve a takeover by Tellabs Inc. (Lisle, Ill.), Ciena faced an
inexplicable decision by AT&T Co. to discontinue testing of Ciena's 40-channel WDM system, leading to a collapse of
Ciena's stock price.
The original $7.1 billion Tellabs deal was renegotiated in early September for $4.6 billion. But a decision by alternative
carrier Digital Telepoint Inc. to go with WDM systems from Pirelli Cable led to another precipitous fall in Ciena stock.
On Sept. 14, Ciena announced that the merger plans with Tellabs were canceled, leading to a third stock drop. On Sept.
15 Ciena closed at 13, representing a 77 percent fall from its glory days on Wall Street.
Ciena chief executive Patrick Nettles announced a reorganization under which Steve Chaddick, former senior vice
president for products and technologies, will oversee strategy and corporate development. It's no surprise that
Chaddick will focus on extensive testing of optical systems with carriers, and on showing the reliability and ease of use
of Ciena's DWDM systems, still the only dense-wavelength systems to ship in large volumes.
What makes the task daunting, as Chaddick lamented during an interview at the National Fiber Optic Engineering
Conference in Orlando, Fla., is that Ciena did not fail to execute in terms of delivering products on time, or in delivering
products that worked. Responding to a Wall Street perception that a company is in trouble becomes almost an exercise
in shadow boxing.
"I really don't see anything we would have done differently," Chaddick said. "We are shipping DWDM products, we
have a sound strategy and we have 1,500 motivated employees who are now angry employees, perhaps justifiably so."
But Chaddick said that Nettles' decision to reorganize middle-level management was not driven by the stock collapse, or
by the end of merger discussions with Tellabs. Instead, he said, Ciena's top executives used the turmoil to reexamine
what the customer base was like. When Ciena first rolled out its 16-channel long-haul DWDM systems, it had a handful
of interexchange-carrier customers like Sprint and WorldCom. With the advent of metropolitan-area DWDM systems
and denser 40-channel multiplexers, Ciena was dealing with a larger variety of small, competitive local-exchange
carriers, second-tier interexchange carriers and other public-networking companies that could prove more fickle in
buying habits than the large carriers.
At the same time, companies ranging from Lucent Technologies to Cambrian Systems have begun shipping DWDM
systems for both metropolitan and long-haul networks, giving Ciena its first real multitiered competition.
Ciena's advantage, Chaddick said, will be a detailed understanding of performance monitoring, and a grasp of what
types of electrical-layer system protection will have to be preserved as customers try an exotic mix of Internet Protocol
over Sonet, IP-over-ATM-over-Sonet and even IP over a raw optical DWDM layer.
Many companies are talking about abandoning all electro-optical conversions in order to conduct all switching and
routing in the optical layer. Chaddick said that what these developers forget is that per-port monitoring, necessary for
advanced quality-of-service features, still requires electrical-layer monitoring and network management, something
Ciena has specialized in since day one.
"There's no end to fascinating optical-networking ideas out there, but if someone wants to build a real-world network
out of view graphs, let them try and do it," Chaddick said.
Chaddick's message was borne out in technical sessions at the Orlando conference this week, when representatives from
Bell Atlantic and BellSouth described the heavy degree of fault testing and dispersion studies done by Ciena researchers
in building DWDM test beds.
With a reduced share price, Ciena remains an attractive target for Cisco Systems Inc. and other companies rumored to
be interested in it, though Chaddick would not comment on any future suitors taking Tellabs' place. But with a reduced
capital base, it is also harder for Ciena to justify the significant amount of in-house manufacturing and test necessary for
building its proprietary systems. The company designs its own Bragg gratings, for example, to achieve a channel
density that would not be possible using discrete optical filters. Ciena also finds it necessary to manufacture its own
optical amps for its systems.
"We have a huge amount of money invested in developing the things we could not outsource, including assembly of
optoelectronic modules," Chaddick said. "Not even Lucent goes this far; it buys a lot of its components from Corning."
Provided Ciena can expand its customer base with the right prices and feature sets to appeal to the new, smaller breed of
carrier, the only thing the company can do is to continue on its existing path, improving execution by delivering reliable
products on time. Fortunately, Chaddick said, customers are not responding to the Wall Street turmoil. If anything, the
events are giving the company a positive backlash, as existing customers and new prospects say that Ciena was
hammered unnecessarily in a month of events company executives would just as soon forget. |
