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THE DAY AHEAD: Ciena, Sycamore stoke fiber optic love affair

Wall Street's love affair with fiber optic networking stocks shows no signs of abating -- especially when companies like Ciena Corp. (Nasdaq: CIEN) and Sycamore Networks (Nasdaq: SCMR) unveil strong quarters.

Aside from the obviously huge market opportunity, investors just love new companies that can go from 0 to profit in about three quarters. Sure, you could argue the optical networking crowd is overvalued, but you can't quibble about the results. That's why investors are jumping all over new fiber optic companies such as New Focus (Nasdaq: NUFO) and the soon-to-be-public ONI Systems (Proposed ticker: ONIS).

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Ciena (profile), one of the old guys on the optical networking block, topped estimates in its fiscal second quarter with earnings of 12 cents a share, two pennies above consensus. But the real story is the top line growth. Ciena reported sales of $185.7 million, up 66 percent from a year ago. For a bit of context, Lehman Brothers analyst Steven Levy projected sales of about $171 million.

Not too shabby -- especially since Ciena was dead money 20 months ago. Flashback: In September 1998, Ciena shares were about 13 after Tellabs (Nasdaq: TLAB) dumped plans to merge with the company. Bargain hunters willing to take the risk made out pretty well.

Ciena makes dense-wavelength division multiplexing (DWDM) systems for use with long-distance fiber optic telecommunications networks. The company also recorded sales to 22 customers in the second quarter, compared to 13 a year earlier. A diversified customer base is a big deal with the networking crowd. Ciena, which got a revenue boost from a yet-to-be-named customer, also predicted a strong second half.

There were a few glitches that could trip up Ciena shares today. Ciena's MultiWave EdgeDirector product hasn't sold as well as expected and won't boost revenue. But the outlook and future revenue from a Qwest Communications (NYSE: Q) contract should offset lingering concerns. Ciena competes with Nortel Networks (NYSE: NT), Sycamore, Lucent Technologies and Pirelli S.P.A., which was acquired by Cisco Systems (Nasdaq: CSCO).

Not to be outdone by Ciena, Sycamore Networks, which also makes fiber optic networking gear, checked in with third quarter earnings of a nickel a share, excluding charges. First Call Corp.'s consensus poll of 10 analysts predicted a profit of 3 cents a share.

Revenue was $20 million above expectations at $59.2 million, up 104 percent from the second quarter. The outlook for Sycamore looks good, but it has to continue to diversify its customer base. Sycamore has eight customers, but Williams Communications Group (NYSE: WCG) still generates the majority of sales.

Despite Sycamore's results, don't expect a big rally today. The company historically (all of five public quarters) has grown 50 percent to 100 percent a quarter. Don't expect that in the future because of Sycamore's growing revenue base, said CFO Frances Jewels.

Worrying because a company can't grow 100 percent a quarter is a bit silly, but Wall Street will do it anyway.

Could this optical networking love affair end? Not anytime soon. The demand for fiber optic components is estimated to top $22.5 billion by 2003, up from $6.6 billion in 1999, according to research firm Ryan, Hankin & Kent. Component company JDS Uniphase (Nasdaq: JDSU) upped its revenue target Thursday, and both Nortel and Cisco are betting big on fiber optics.

"There's no reason why it won't last," said Levy. "We're in hyper growth."