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Ciena Cites Progress

Scott Moritz

The telecom-equipment maker beat quarterly estimates Thursday and put profitability in sight for next year. The company also said that it was seeing bigger orders coming in and costs continuing to come down.

"The pieces have started to come together," CEO Gary Smith said in an interview after the company's earnings conference call. But Ciena shares, which rose 5% in the morning after the strong report, settled back to a mere penny's gain at midafternoon.

Part of the problem is that investors have heard the Ciena comeback story a few times before. Another wrinkle is that Ciena's modest success puts it more firmly in league with some other stock-market idlers, like Lucent (LU Quote) and Nortel (NT Quote).

Still, some critics have started to change their outlook on the Lithicum, Md., tech shop.

"I think they are coming around," says Telecom Pragmatics analyst Sam Greenholtz. In the past, he has questioned the company's scattershot acquisition strategy. But "now that they've stopped buying everything in sight, and realized they have to cut costs and improve margins, I think they are on the right trail," he says.

Ciena won few fans during the telecom collapse by trying to spend its way out of trouble. In three years, the company spent more than $1 billion to acquire five companies. The moves helped Ciena expand beyond its core optical networking niche and sidestep the full impact of the crash.

And the flow of cash going into the furnace has also slowed down. Cash burn, which was at $50 million a quarter earlier this year, fell to $9 million in the most recent period.

The company now says it will be profitable by the end of its fiscal year in October 2006. Analysts estimate that the quarterly revenue required to hit break-even is about $150 million. That implies top-line growth of 27% from the past quarter.

Smith says the company's 44% annual growth rate puts that target in easy reach.

"We've got some challenges, no doubt," says Smith, "but we believe we can get there."

One encouraging sign is that Ciena has been winning more orders with outfits like Sprint (S Quote) and BellSouth (BLS Quote), two telcos that happen to be building network capacity as others rethink spending plans. For example, big customers like AT&T (T Quote) and MCI are wrapped up in merger integration planning and not yet ready for network overhauls.

From Smith's standpoint, the stabilization of the telco market is starting to provide Ciena benefits.

"We're seeing larger order sizes coming through the existing customer base and new deals," says Smith. "I think it's a reflection of the steadily improving market."