Ciena Buy Strategy Paying Off

Ciena's (CIEN) chief says the bold strategy of buying companies during the telecom downturn is starting to pay off.

The Linthicum, Md., networking-gear maker gave investors a pleasant surprise Thursday by posting solid revenue gains and raising its sequential sales-growth guidance to 5% in the current quarter.

Ciena is still burning through loads of cash -- about $50 million in the most recent quarter -- and has no profits in sight. But Ciena CEO Gary Smith said in an interview Thursday that the company is starting to benefit from a broader product range and shifting trends in communications technology.

It seems that higher volumes of Internet use and phone calling plus the confluence of different traffic types on common pathways are pushing telcos to buy new gear that can better merge and manage networks.

Ciena originally specialized in optical networking gear that was very popular during the boom, when new fiber-optic networks were rapidly replacing the old-line phone systems. But when optical expansion plans halted, Ciena's hot products cooled off.

But instead of conserving cash during the telecom crash, Ciena put its ample money pile to work. In three years, Ciena spent more than $1 billion to acquire five companies. By adding technologies and, perhaps more important, new revenue, Ciena has partly sidestepped the full impact of the industry's collapse.

While not ready to take a bow, Smith says the company now has "most of the pieces we need."

"We were faced with some big challenges and we had to make some strategic decisions," says Smith, referring to Ciena's controversial damn-the-losses acquisition spree. Smith says he was guided by the notion of a "converged architecture" for networks that could handle the computer world's love for Internet protocol and ethernet, as well as telecom's unique lingo like asynchronous transfer mode, or ATM.