Ciena Comes Under Fire Over Management Focus

A research shop says the company has made the wrong bets, but Ciena says it's too early to tell.
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Like many fallen tech-sector darlings, Ciena (CIEN) - Get Report is finding that the harsh light of a downturn has a way of exposing flaws in a once-sparkling business.

A blistering report Thursday from networking researchers at CIR -- a strategy firm, by the way, that used to pen mostly glowing praise for Ciena -- says the company's management has gone adrift, allowing the optical gearmaker to neglect its technological strengths and strain customer ties.

The report, based on industry surveys and analysis, charges that Ciena has fragmented what once was a strong product strategy and, in the process, helped to undermine the company's commitment to critical gear at the heart of its customers' networks.

Seems there's no shortage of critics when things are going poorly. Ciena, due to report second-quarter earnings in a week, has seen revenue slide some 90% in the past year and a half, as phone companies slash spending and demand dries up for highly advanced networking upgrades. And if the market itself weren't bad enough, critics like CIR say mismanagement has only made Ciena's squeeze even worse. Ciena rose 23 cents Thursday to $5.96.

Swinging

While management second-guessing is very much the backlash of market disappointment, just as glorification accompanies success, the CIR report nonetheless takes a direct swing at Ciena CEO Gary Smith. Among the report's conclusions is that instead of veering from one hot product acquisition to another, Ciena would be better off with a steadier hand on the wheel.

"They just need to relax and ride it out at this point," says CIR's Mark Lutkowitz, one of the authors of the report. "They accomplished something extraordinary. They were a startup that became successful. But now they are overly obsessed with the next quarter's numbers.

"Getting

Chairman Pat Nettles back as chief executive would certainly help them regain credibility," says Lutkowitz.

Hard Right
Ciena's revenue downtrend

Ciena doesn't agree. "The only way to judge how well we are managed is to see how the company does over the long term," says Ciena spokesman Glenn Jasper. "And I don't think CIR knows that outcome yet."

While CIR has been a harsh critic of many players in the industry, such as

Lucent

(LU)

and

Nortel

(NT)

, the withering 18-page report on Ciena marks a departure from reports earlier in the year that were much more favorable to the Lithicum, Md., telecom equipment shop.

Ciena was a consistent CIR consulting and report customer last year, but has become an on-again, off-again customer this year. CIR says there is no connection between Ciena's decreased demand for CIR services and the critical tone of the report.

'Mad Scramble'

But CIR is far from alone in questioning Ciena's vow to spend its way through the downturn by trying to acquire technologies that will add to its product offerings. The acquisition of ONI early in the year

drew criticism because it added costs and losses to a company already facing a wave of red ink.

Ciena struck gold in the late '90s with an optical transport technology called Wave Division Multiplexing, or WDM, which increased the capacity of optical fiber by splitting lightwaves into different colors. Each colored lightwave acted like a separate information channel, allowing multiple channels on one strand of fiber.

Ciena then did one better, acquiring an optical switching company called Lightera in 1999. The Lightera technology became Ciena's highly successful CoreDirector switch that helped propel sales even as equipment spending was drying up.

Instead of conserving resources and keeping the focus on their successful products, CIR's Lutkowitz says Ciena has "been on a mad scramble to find another magic bullet."

By CIR's estimates, that has made Ciena less responsive to its customers, who demand a lot of intensive product support hand-holding to assure that their networks keep on humming.

"A customer has to have a warm feeling about this equipment," says CIR analyst Sam Greenholtz, a co-author of the report. "When you are talking about core switching and long-haul transport, there is a potential for large-scale disaster."

That sort of sentiment harkens back to a comment that then-CEO Nettles made a couple years ago as he described his

formula for success. Said Nettles: "Over the long term, it's who has the customers and who keeps those customers satisfied."

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