Newly Swaggering Ciena Notches Three More Optical Wins

How things change. The telecom-gear business is so lush that even Ciena (CIEN Quote - Cramer on CIEN - Stock Picks) is swaggering -- and backing it up, to boot.

Uptrend Ciena's weeklong rise

Ciena Thursday posted fiscal third-quarter earnings of 19 cents per share, beating expectations by 2 cents, on an 80% increase in revenue. The Linthicum, Md., maker of optical switches also told reporters and analysts on a conference call that it had gained three new customers for its next-generation optical switch.

Ciena shares jumped 16 1/2, or 10%, to close at 179 3/4 Thursday. The company's shares enjoyed a quick run-up earlier this week on news of its stock split, continuing a long run of good news following the company's 1998 near-death experience.

Breakthrough

Most notable were Ciena's wins in the switching-product category. While not enormously significant in terms of immediate revenue, these deals could mark a breakthrough in a critical segment: gear for virtually all-new networks. Ciena didn't disclose which companies have agreed to buy the switches or when, though Williams Communications (WCG Quote - Cramer on WCG - Stock Picks) this month told TheStreet.com that it was closing in on a 40-switch Ciena deal for its national network.

Back to the Summit Ciena returning to spring highs

Source: BigCharts

These switches act as the intelligence points where big new Internet pipes connect. As these pipes get bigger and carry more traffic, phone and Internet carriers need bigger, faster junction boxes to manage the deluge. Call them the killer application of networks: These optical switches can dramatically reduce network operation costs and, more important, allow operators to eyeball traffic patterns. This can permit better traffic management and help turn such things as setting up dedicated lines for big users into an immediate process rather than a week-long, sometimes month-long ordeal.

"This product is going to be very meaningful to Ciena in fiscal 2001," says Robertson Stephens analyst Paul Silverstein, who has a buy on Ciena. "That's very clear." Robertson Stephens has no banking ties to Ciena.

Ciena isn't alone in its efforts to crack this market. Upstart rival Sycamore (SCMR Quote - Cramer on SCMR - Stock Picks) recently announced that fiber-optic network outfit 360Networks (TSIX Quote - Cramer on TSIX - Stock Picks) had agreed to buy a competitive optical device for an unspecified future use in its network. And soon-to-be-public Tellium says four potential customers are testing its competing optical switch. But several observers say Ciena's deal with Williams, and its three unnamed committed buyers, suggest its product is further along in development.

'Well Ahead'

"I'm trying not to be arrogant about this, but we are well ahead of the competition right now in terms of deliverable features and functionality," said Ciena's COO Gary Smith, in an interview after the conference call Thursday.

"But are we paranoid about everybody and everything? Yes, I hope so," says Smith. "Yet when it comes down to people really making decisions about product we really don't see much competition right now."

Of course, that's the switching market, where we're still looking at the opening credits. The optical backbone market, however, is a different flick. Ciena is a second player in a picture dominated by Nortel (NT Quote - Cramer on NT - Stock Picks). But even in that role, Ciena has been able to impress the critics.

Smith happily ticked off a list of Nortel customers that have shifted some of their buying to Ciena. The list includes Qwest (Q Quote - Cramer on Q - Stock Picks), Cable & Wireless (CWP Quote - Cramer on CWP - Stock Picks), and BroadWing (BRW Quote - Cramer on BRW - Stock Picks). "When we get in head-to-head technology play with Nortel, we tend to win," Smith said. "Our optical sales growth nearly doubled the Ciena figures, so I think the facts speak for themselves," replies a Nortel spokesman.

But obviously, with a swagger like that from Ciena, you might forget its crash two years ago, which resulted from the company's failure to win an expected contract for breakthrough technology products. But then, 1998 is a long time ago in light years.