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Can Ciena buck the trend?

With the telecommunications sector slumping, Gary Smith becomes CEO of the fiber-optic equipment maker in the midst of a shakeout and a looming price war.

 

  
   
Can Ciena buck the trend?
By Larry Dignan
Special to CNET News.com
May 21, 2001, 12:30 p.m. PT

Fiber-optic equipment maker Ciena has emerged as an anomaly of the telecommunications sector.

Despite industrywide problems with demand, inventory and sluggish earnings, the company has managed to consistently deliver strong financial results amid the turmoil.

Ciena topped Wall Street estimates for the second consecutive quarter even though telecom-equipment makers are under pressure as telecom companies have cut back spending.

The company reported pro forma second-quarter earnings of 20 cents a share to easily beat estimates. Sales of $425.4 million were up 20 percent from the first quarter and 129 percent from a year ago.

Meanwhile, Ciena has won big contracts such as a recent deal with TyCom, an undersea network company. Ciena makes equipment that increases the capacity of long-distance fiber-optic telecommunications networks by transmitting multiple signals simultaneously over the same circuit. The company's customers then use that extra capacity to offer new services to customers.

Ciena's CoreDirector switching products have allowed it to get a leg up on the competition, including companies such as Corvis and Sycamore Networks, among others.

Company executives recently acknowledged that Ciena is likely to see pricing pressure from giants Nortel Networks and Lucent Technologies, but they remain confident that the company can continue to grow at a rapid clip.

We're not immune to all of this. We've seen delayed orders and orders reassigned. Gary Smith, who last week was promoted to chief executive, talked in a recent interview about the health of the company he's about to lead.

Q: Ciena has managed to produce strong earnings and sales in a telecom-equipment market that's struggling. How is this happening?
A: It's a combination of things. The main thing is the shift to next-generation networks and having a complete portfolio of products in that area. We have the MetroDirector K2 switching system now, which means we have (equipment for metropolitan networks) in place. And we're getting traction with Level 3 (Communications) in that area. It's really that we're with tier one carriers, which is really important in these constrained economic times. I think it's a combination of those two with a more diversified customer base.

How much of your success do you attribute to the focus on gear for long-distance networks?
I think that's a factor. With things like CoreDirector, it's just a more compelling product. In a more constrained economic environment...you're really looking carefully at where you're going to spend your dollars. CoreDirector reduces your capital costs, reduces your operating costs, and brings more intelligence to your network.

Communications carriers are cutting capital spending. How is Ciena capturing revenue during these tough times?
I think there is a shift going on to this next-generation piece in general. We've seen that for a while, and that's continuing even in the times we're in now. We're not immune to all of this. I think we're used to dealing with situations where legacy providers don't have the technology and have to compete on price. That may or may not produce lower gross margins for us. We've seen delayed orders and orders reassigned, particularly on the transport side. We haven't seen that in the CoreDirector space. I just think that our value proposition with a customer allows us to navigate a little better through this than certainly the legacy competitors we typically have to fight.

Speaking of legacy competitors, you mentioned on your conference call that you are seeing price competition from rivals and that it could hurt your profit margins. Were you just being prudent, or is this something you are seeing all the time?
I think we're used to dealing with situations where legacy providers don't have the technology and have to compete on price. That may or may not produce lower gross margins for us. We're constantly reducing the costs to make our products. The key will be whether the cost reduction curve can keep pace with the price cuts. You could describe it as us being prudent, but in a more uncertain climate, we feel it is appropriate to talk about it.

When do you see the telecom sector getting better as an industry?
Clearly, it's going through a shakeout now in terms of carriers and suppliers. It's difficult to predict the timing of that. But I think it's just a normal cycle. It got overheated and it's a cycle that's going on. And the strong will prevail both in the carrier and supplier case. We're focused on taking share from the legacy players. To answer your question, it's difficult to predict. Some people are saying it's coming around now. Others are saying it'll come around next year.

The ecosystem definitely seems off. When a company like 360networks sees trouble ahead, you can almost watch the ripples down Wall Street. Is this going to be a constant?
I don't think it's going to be a constant. We're going to go through a cycle and emerge more orderly. It's the uncertainty right now. That should pull out at some point--it's just difficult to predict when.