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Ciena cuts outlook, investors cringe

Shares of the communications-equipment maker are walloped after it cuts its earnings and revenue targets.

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Shares of Ciena were walloped Thursday after the communications-equipment maker cut its earnings and revenue targets.

The news sent the stock plunging to a low of $18.60 Thursday. Shares closed down $8.50, or 30 percent, to $19.62. Investors took Ciena's outlook hard because the company has been one of the few in the sector that has been able to weather the economic downturn.

Indeed, Ciena doubled its profits for the third quarter, but the strong results were overshadowed as soon as the company's conference call started.

Ciena lowered earnings guidance on the current fiscal year, saying it now expects to report an adjusted earnings-per-share figure of between 59 cents and 64 cents, with 2002 earnings essentially the same. Shares of Ciena fell $8.03, or 28 percent, to $20.09.

Analysts had been looking for the company to report earnings per share of 73 cents for the fiscal year, and 98 cents per share for 2002, according to First Call. Revenue in the fourth quarter will be 12 percent to 20 percent lower than in the third quarter as a result of slower growth in long-haul transport and a product mix change by its customers, Ciena executives said.

"In 2002, revenue should grow in the early teens," CEO Gary Smith said, which is lower than earlier guidance but "still a healthy growth rate in light of enormous market uncertainty."

Smith said on a conference call that the problems in the telecom market are a product of "a change in spending, not a fundamental change in the underlying demand for bandwidth."

Ciena sells optical equipment, which is supposed to be cheaper and make networks more efficient than older electronic networks, or even than hybrid electronic-optical networks.

The ability of Ciena's products to cut costs had enabled it to stay above the telecom fray. The telecom market has essentially been in freefall over the past few months, as telecommunications carriers cut back drastically on their capital spending. Equipment makers such as Nortel Networks, Cisco Systems and Lucent Technologies have issued warnings and written off inventory.

Ciena's outlook dinged its rivals, notably ONI Systems, which saw its shares fall $3.57, or 19.21 percent, to $15.01. The CNET Telecom Equipment and Networking indexes also fell sharply.

Still upbeat
Despite the turbulence, the company stressed its belief that things aren't a bad as they may seem.

"In this environment, an investment decision should be made less on short-term performance, but (rather on) who the survivors of a shakeout will be," CEO Gary Smith said. "We know we?ll be among the survivors, and we continue to believe we'll be one of the strongest."

Indeed, the company said it plans to continue increasing its number of employees at a time when its competitors are laying off thousands of people.

"The company will ride this out. They have been riding it out and in the process gaining (market) share, and that's likely to continue," said UBS Warburg analyst Nikos Theodosopoulos. "But the stock price is a function of earnings (and won't recover) until people feel comfortable that the worst is behind them."

And that could take a while, he said. The long-haul business is the largest part of Ciena's business, he said, and that sector shouldn't begin to see a recovery until at least the second half of next year.

Ciena Chief Financial Officer Joseph R. Chinnici said sales related to its CoreDirector optical switches increased 20 percent over the second quarter, and sales related to its CoreStream optical transport systems rose 48 percent over the second quarter.

But while CoreStream sells into the long-haul network, it works with much faster speeds, with capacity of 1.6 terabits per second over a single fiber. Sales of other long-haul products have been significantly slower, and will contribute to a 300 to 400 basis-point drop in gross margins from the third quarter to the fourth quarter. Chinnici said long-haul sales will be flat to slightly lower in fiscal 2002 compared to 2001.

Smith also downplayed talk of a bandwidth glut, which would hurt Ciena's results for the foreseeable future.

"I think (this has) all been oversimplified as a capacity glut," he said. "The combination of excess capital and vendor financing created a bubble for telecom equipment. The resolution will depend on cleansing of financial efficiencies and widespread adoption of new technology, particularly by large carriers."

Strong third-quarter results
For the third quarter Ciena recorded net income of $58 million, or 18 cents a share, compared with $28.7 million, or 10 cents per share, in the year-ago quarter.

Revenue for the quarter was $458.1 million, up from $425.4 million in the second quarter.

Excluding deferred stock compensation charges, payroll taxes on stock options and a benefit from previously written-off receivables and amortization of intangibles and goodwill, the company reported a profit of $58 million, or 17 cents per share.

Analysts were expecting the company to post a profit of 16 cents a share, according to First Call.

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