Telcos Love Ciena

Ciena (CIEN Quote) CEO Gary Smith says telcos are embracing the networking specialist.

The Linthicum, Md., telecom gearmaker beat and raised its financial targets on strong demand for advanced networking equipment. Ciena shares jumped 11% on the news Thursday, setting a 52-week high.

The rally, Smith says, reflects the fact that Ciena has found a hot technology niche that is somewhat out of reach of larger networking suppliers such as Cisco (CSCO Quote), Nortel (NT Quote) and Alcatel Lucent (ALU Quote).

"Our customers say: 'We understand the value of the large players, but we like those with critical mass in the space they specialize in,'" says Smith.

As the midtier player swimming with the big fish, Ciena has managed to work its niche role to its advantage -- especially as telcos look for new gear to run even higher-capacity networks.

Ciena makes a range of networking equipment like optical switches to direct network traffic and fast Ethernet gear to help merge different types of traffic on and off network pathways.

"Ciena has benefited from a shift in overall spending to converged Ethernet," says Smith.

But Ciena's fiscal second quarter results revealed one of the downsides of being a smaller and presumably more nimble operator in the field. The company saw its gross margin narrow to 42.7% -- a two percentage-point drop from the prior quarter -- due to unusually weak service revenue margins.

Smith blamed a lot of installation work and troubles with one customer for the 1.1% gross margin on its tech support revenue.

"It was a timing issue more than anything else," says Smith. Ciena was caught in what he calls an "ugly duckling" phase of its transition to more in-house tech support from an all outsourced model.

Observers might wonder if Ciena is getting in over its head as its business grows and its customers' service demands exceed its ability to put out the fires and close trouble tickets.

Smith says his company isn't out of its league and that it has hired and trained new technicians to meet the customer support needs.

"You've got issues you have to deal with as you grow," says Smith.

Obviously for investors, these growth issues aren't such a bad thing.