Analysts' Positive Comments about CIEN. Enjoy!
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08:45am EST 3-Nov-98 BancBoston Robertson Stephens (Silverstein, Paul 212-407
CIEN: Update: Where To From Here? (Page 1 of 2)
November 2, 1998
C I E N A C O R P O R A T I O N
Update: Where To From Here?
Paul Silverstein (212) 407-0440 paul_silverstein@rsco.com
Paul Johnson, CFA (212) 407-0415 paul_johnson@rsco.com
BancBoston ROBERTSON STEPHENS BancBoston ROBERTSON STEPHENS
Ciena Corporation CIEN $ 21.81 11/3/98
Industry: Networking
Paul Silverstein212 407 0440
Change in Yes/No Was Is Paul Johnson, CF212 407 0415
...Rating: No BUY
...EPS 1997: FY OCT F1997A F1998E F1999E
...EPS 1998 Yes $0.85 $0.80 EPS*: 1Q $0.13 $0.37A $0.00
...EPS 1999 Yes $0.20 $0.14 2Q $0.26 $0.29A $0.02
52-Week Range: $92-8 3Q $0.33 $0.15A $0.05
Shares Outstanding(MM) 108.2 4Q $0.35 ($0.01) $0.07
Market Cap ($MM) $2,360 Year $1.08 $0.80 $0.14
Avg Daily Trading Vol (00 7,767 P/E 20.2x 27.1x 154.4x
7/98 Bk Value/Sh $4.44 CY $1.32 $0.43 $0.22
7/98 Tot Debt/Tot Cap 0% CY P/E 16.5x 50.4x 97.5x
Trailing ROIC: 51% Revs($M): F1997A F1998E F1999E
Price/Book Value: 4.9x 1Q $53.9 $134.3A $85.0
EBITD/Sh: $0.22 2Q $86.7 $142.7A $96.0
Div/Yld: $0.00 NM 3Q $112.2 $129.1A $110.0
3-Yr Sec Growth Rate: 30% 4Q $121.0 $80.0 $125.0
* fully taxed Year $373.8 $486.1 $416.0
MktCap/Rev 486% 567%
Key Points:
** While we do not believe that there is any basis for the acquisition concerns
currently swirling around the stock, we do believe that Ciena offers an
attractive investment opportunity based on its operating fundamentals.
** We believe that Ciena continues to enjoy both outstanding R & D and superior
manufacturing. Three different new products currently are scheduled to ship
in calendar 1999.
** While it appears that the company will struggle to make current Street
consensus revenue estimates of $90 million for its fiscal fourth quarter,
the company appears to be building the largest backlog in its history with
which to enter fiscal 1999.
** In addition, as the DWDM market continues to mature, there appear to be more
RFP/RFQs than at anytime since the market's inception. The company recently
announced that it has commenced shipping a large order to a new customer.
** We have adjusted our revenue and earnings numbers for the fourth quarter of
fiscal 1998 and for fiscal 1999. Essentially, we are pushing out our
revenue and earnings estimates by one quarter.
In the wake of the events leading to the cancellation of Ciena's merger with
Tellabs (TLAB $53) and before we seek to answer the question of where to from
here, we need to inquire as to how Ciena arrived at its current point of
departure. At the time the Ciena-Tellabs merger was announced, investors
viewed Ciena as the leading vendor in the DWDM equipment market, which we
believe is at the core of the huge ongoing infrastructure buildout by
communications service providers throughout the world. Ciena was acknowledged
as having a clear technological lead over its competitors in the DWDM market.
With the embrace of Tellabs, Ciena was perceived as gaining (1) insulation from
the risks attending significant customer concentration and concomitant revenue
lumpiness and earnings volatility, and (2) considerably greater resources---
financial, sales and marketing, etc.---with which to beat back the threat posed
by its significantly larger competitors, including Lucent (LU $83-1/8), Nortel
(NRT $57-1/8), Alcatel (ALA $22-1/8) and NEC (NIPNY $40).
In our view, the events that conspired to scuttle the merger highlighted the
business risks that had attended Ciena since its inception as a public company.
In our view, Ciena has always been David battling a slew of Goliaths, with its
slingshot being its R&D and manufacturing prowess. In the wake of AT&T's
decision not to proceed with any further trials of Ciena's products and Digital
Teleport's decision to award to Pirelli the bulk of its DWDM requirements,
however, the investment community appears to have abandoned its belief that
Ciena enjoys a convincing and formidable technological lead over its
competitors. Absent such lead, Ciena appears at a disadvantage given its
competitors' significantly greater resources--financial, R & D, sales and
marketing, products and services.
Competitive Advantages---Erosion? We asked ourselves the question: What is the
actual extent of the erosion of the advantages that Ciena was once perceived to
have enjoyed vis-a-vis its formidable competitors? We first need to specify
exactly what were and/or are those advantages, alluded to above. In short, we
believe they are superior research and development and manufacturing expertise.
In terms of R & D, Ciena to date has beaten its competitors to the market with
five different DWDM systems. For a start-up company to accomplish this feat
once is highly impressive, but not necessarily conclusive of the presence of a
sustainable advantage. For a company to accomplish this five different times,
however, we believe strongly suggests superior R & D.
The second major advantage, related to the first, is what we perceive to be
Ciena's substantial DWDM manufacturing expertise. This latter advantage appears
to be a substantial differentiator that is under-appreciated by the market. On
this score, we believe that the design and integration of optical components
into DWDM systems and the cost-effective manufacturing of such systems is far
from a trivial undertaking. Quite the contrary, we believe this ability is one
of the key differentiators between the various DWDM vendors.
While we note that there are many more competitors showing and/or issuing press
releases announcing 40 (or greater) channel DWDM systems, we also note that
Ciena's 40 channel system currently remains the only such system actually to be
deployed in the field by a service provider. While the competitive landscape
thus appears to have shifted, given the incredible technological sophistication
of DWDM systems, the only accurate indicator of such landscape is product
deployment by customers and the timing thereof. In our opinion, the
possibility remains that the DWDM systems of Ciena's competitors will not live
up to their press releases, or at least not in an acceptable time frame. We
also note that Ciena appears to be first to market together with Cambrian
Systems, which is an affiliate of Newbridge Networks (NN $22-1/16), with a
ring-based product optimized for the metropolitan area networking market. While
we believe that other established DWDM vendors will no doubt turn their eyes
toward this market, with the exception of Ericsson (ERICY $23-3/8), none of the
established vendors appear to be close to addressing this opportunity.
R & D and Manufacturing---Product Pipeline. Having recently spent some time at
the company interviewing key operating personnel and talking with various
vendors of optical components and leading industry analysts, we believe that
Ciena continues to enjoy both outstanding R & D and superior manufacturing.
Three different new products currently are scheduled to ship in calendar 1999.
We believe that these products will benefit from the knowledge-base advantage
attending first-mover advantage.
Organization--Stability and Rejuvenation. We note that Ciena's organization
appears remarkably stable in the wake of the events of the past three months.
The company has experienced only three employee departures, only one of whom
defected to another organization. Ciena has resumed expanding its sales and
marketing organizations, which expansion had been suspended pending the Tellabs
merger. Moreover, confronted by Tellabs's rejection and the market's apparent
vote of no-confidence, the rank and file appear to be rejuvenated, refocused
and passionately intent on proving the prematurity of the announcement of their
demise and their ability to replicate their past success.
Customer Pipeline. We believe that the company will struggle to make current
Street consensus revenue estimates of $90 million for the current fiscal fourth
quarter, which closed at the end of October. We note, however, that the
company appears to be building the largest backlog in its history, with which
it will enter into the fiscal 1999, by a factor of five to seven times its
normal relatively nominal backlog. In addition, as the DWDM market continues
to mature, there appear to be more RFP/RFQs than at any time since the market's
inception. In our opinion, while we do not expect Ciena to win all of these
awards, given the company's current market valuation, even a handful of wins
should help reverse the perception that the company's best years are behind it.
Ciena recently disclosed that it has commenced shipping product under a large
contract with a new unnamed customer on the West Coast. We believe that this
customer is one of the crop of new alternative service providers. In addition,
we believe that Bell South has recently finalized its inter-office DWDM MAN
deployment plans and that such plans include Ciena. We also believe that Ciena
is being considered by SBC Communications in a similar inter-office DWDM MAN
buildout, although no decision appears to be imminent.
Valuation. With almost $2.00 per share of net cash on its balance sheet, Ciena
currently is trading at a technology value of approximately $2 billion. We note
that less than 30 days ago Alcatel announced that it was paying $350 million to
buy Packet Engines, a Gigabit Ethernet start-up vendor with little to show in
the way of revenues. In April, Lucent paid $1 billion cash for Yurie Systems,
an ATM access switch vendor with a fraction of Ciena's revenues. There were
similar transactions effected within the past year involving communications
equipment companies, the valuations of which lead us to contend that Ciena's
current valuation is far from lofty, even absent any basis for the current raft
of takeover concerns. Moreover, a number of private DWDM start-up ventures are
receiving private market valuations well in excess of $100 million. Not only
have these companies yet to ship any products for revenue, most of them indeed
are still in the R & D stage of product development.
Financial Model. We have adjusted our projection of Ciena's revenues and
earnings for the fourth quarter of fiscal 1998 to bring our estimates more in
line with the company's revised guidance offered earlier in the quarter. As a
result, we have also revised our revenue and earnings estimates for fiscal
1999, essentially pushing out our estimates by a quarter. We note that we are
taking what we believe to be a very conservative outlook regarding the
company's prospects for fiscal 1999.
We believe that as Ciena announces its new products and customer wins and as
the company returns to growth, the market will take notice and bid up Ciena's
shares.
THE COMPANY:
Ciena is a leading provider of advanced high-bandwidth fiber-optic Dense Wave
Division Multiplexing (DWDM) systems. DWDM systems are next-generation
physical devices used to increase the bandwidth transmission capacity of fiber
optic telecommunication networks by expanding the bandwidth transmission
capacity of fiber optic cables. Ciena's DWDM systems send multiple independent |
