Ciena ( CIEN) cut third-quarter sales projections Thursday, putting its hard-won mini-growth streak in jeopardy. But CEO Gary Smith, hinting that acquisitions will continue, promised that the top-line improvements stemming from his bold expansion gambit would resume in the fourth quarter.
Investors, meanwhile, were stubbornly keeping their eyes on the bottom line and fretting about the nearly unabated flow of red ink. Shares of the Linthicum, Md., networking gearmaker fell 48 cents, or 9%, to $4.90. Earlier Thursday, Ciena reported second-quarter results that met Wall Street's expectations. And for the second consecutive quarter, Ciena posted modest sales growth, a rarity in the tech hardware business. But citing a challenging environment, meaning continued weak demand for telecom equipment, Ciena said third-quarter revenue would be roughly $70 million, well below the $76 million Wall Street was hoping for. Amid a crushing three-year tech spending squeeze, Ciena, like its larger rivals Lucent ( LU) and Nortel ( NT), has slashed costs and fired thousands of workers. But while the big gearmakers have continued to pare jobs and products, Ciena drew the line last year, opting to pursue a damn-the-costs approach by broadening its product lineup. Perhaps more mindful of the costs given the downward revision to guidance, Smith said in an interview Thursday that he continues to look for areas to trim expenses. In fact, he recently realigned the company's research-and-development efforts to put more emphasis on customer support and less on product development. While that can't be a comforting sign to Ciena engineers, Smith declined to say what, if any, staff cuts would be involved. On the acquisition front, Smith says he is "actively engaged" in his strategy to reinvent the company by moving it outside the optical transport business and into other facets of networking technology. Last month, Ciena agreed to buy Acton, Mass.-based WaveSmith, which makes what are called asynchronous transfer mode, or ATM, switches. These specialized computers serve as on- and off-ramps where data merge with conventional phone traffic. The gear helps telcos accommodate growing levels of data traffic on their aging networks, sparing the cash-tight carriers the need to tear out old gear and buy new-generation equipment. Though he declined to give a time frame or name any possible acquisition targets, Smith said he is very interested in WaveSmith-type companies that tinker with the types of gear that phone companies can add to their networks now. "That area is a natural progression for us," says Smith. "I think we have architectural and competitive advantages that will be very helpful." Ciena is shopping with $1.8 billion in cash in the bank, and it has made no apologies for a quarterly revenue break-even level that happens to be three times higher than its current sales trends. It's clear Thursday that some investors are not willing to wait patiently to see how the gamble turns out.