Ciena Says No Worries on the Slowdown Front

Seeing no slack in demand for optical networking gear, Ciena (CIEN) said Thursday it is confident that its growth can keep accelerating despite the near collapse of a top customer.

The continuing shift in telecommunications, to higher-capacity optical fiber equipment from older electronic gear, and an expanding customer list have goosed Ciena's growth. The company Thursday beat Wall Street's expectations for fourth-quarter earnings and revenue, boosted its 2001 revenue target and signed a big deal with a network builder. Still, with gross margins narrowing just a touch and the Nasdaq retreating for a second straight day, Ciena shares rose only a quarter, closing at $95.62.

The Bullishness

Ciena President and Chief Operating Officer Gary Smith downplayed the troubles his European customers have been having this year, saying Ciena will sidestep the wreckage of Internet outfits such as iaxis and Global TeleSystems (GTS) by selling gear to the companies that are still standing.

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"I'm still pretty bullish on Europe and our position in that market," Smith said in an interview Thursday after the earnings call with analysts.

Europe represents about 30% of Ciena's business. Most of that came from the near-dead GTS, a top-three Ciena customer that is selling off assets and trading at 56 cents. Europe's phone and Internet service industry is suffering from a heavy debtload and a looming cash crunch -- a situation not unlike that facing the upstart telcos in the U.S., as TheStreet.com examined last week.

Smith said he's confident that GTS will continue to pay its bills, but not quite to the tune of $60 million in contract sales that have been expected by some analysts. GTS "will spend less capital than they did last year, but they have always paid us and they have a good restructuring plan," said Smith.

The Outlook

Ciena raised its 2001 revenue growth forecast to between 75% and 85%, an increase of 15 to 20 percentage points over analysts' previous expectations. But Ciena executives cautioned that expenses would rise accordingly, causing some analysts to question whether the company could sustain its 45% gross margin.

Gross margin in the fourth quarter was 45.1%, slightly below the expected 45.5% due to a new contract manufacturing agreement, which Ciena says will cost less over time.

Ciena also said Thursday that it won a contract from Broadwing (BRW) for optical switches. The terms of the contract weren't disclosed, but Broadwing will use Ciena's CoreDirector switch initially in four of the planned 15 cities in its network buildout.

Broadwing's decision to go with Ciena is bad news for rival optical switch makers Corvis (CORV), Sycamore Networks (SCMR) and Nortel (NT).

Banking On It

On a perhaps related note, Ciena raised the spector of vendor financing during the conference call, saying the practice of lending to customers isn't a fundamental part of its business. Still, Ciena conceded that it has been talking to banks on behalf of some customers. Smith said this wouldn't entail a risk for the company because the loans wouldn't be on Ciena's books. But assuming it is acting as a co-signer for loans from third parties, Ciena could be taking on some risk.

As equipment buyers find they have less cash, they are increasingly seeking financing from equipment sellers. Big equipment makers Nortel, Lucent (LU) and Cisco (CSCO) have notably stepped up financing efforts. Smaller companies such as Sycamore, which had fought the trend, have recently said that in order to compete, they too must offer their customers loans. Sycamore says it will finance as much as $250 million in customer purchases next year.

Ciena also provided some good news on the European bankruptcy front. iaxis is in talks to be acquired by Dynergy (DYN), a U.S.-based power utility looking to get into fiber-optic network operations. Ciena has had to take a $28 million charge to cover iaxis' unpaid bills. With Dynergy entering the picture, Ciena says it will recoup $8.5 million of that loss. Basic math suggests that even when these failed telcos get purchased, the recovery rate is only 30 cents on every dollar owed.

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