Ciena Fans Betting on Broad Revival - TheStreet

If the present's nothing to write home about, you can always focus on the future. So it goes with

Ciena

(CIEN) - Get Report

investors.

The maker of optical networking gear posted a fiscal fourth-quarter loss Thursday that was

slightly narrower than Wall Street had expected, putting a happy gloss on a report that was less than fans had hoped for. The company posted a modest revenue gain, served up a squishy first-quarter forecast and warned that gross margins have peaked for the time being. The stock slipped 3%.

Still, Ciena's unusual grow-through-the-growing-pains approach continues to win praise. That's particularly so with the economy showing signs of strength that some observers expect to bloom into a long-awaited rebound in tech spending. Bulls, and indeed even some skeptics, think Ciena could be among the more buoyant boats once the tide starts to rise.

"They've made the right moves," says Blaylock & Partners analyst Gabe Lowy, who rates Ciena a sell. "They are starting to position themselves as a strong survivor."

Progress

Indeed, the Linthicum, Md., company's sputtering, cash-burning financial performance is only part of the story. Ciena has managed to make some headway on its bold strategy to broaden its product lineup through acquisitions. The alternative was to join peers like

Lucent

(LU)

and

Nortel

(NT)

while cutting costs and products in hopes that it could ride out the three-year telecom recession.

Two years ago, more than 90% of Ciena's revenue came from sales of its so-called core optical equipment, the machinery used to transport light waves over long-distance fiber optic cables. Today, core optical is 26% of sales -- reflecting both a slump in demand but also a dramatic drop in prices.

Through acquisitions of metro optical networker

ONI

as well as data gearmakers like

Wavesmith

, and most recently

Akara

, Ciena has been able to adjust its product offerings to meet the changing demand of telcos.

Ciena executives say the company will reach a breakeven point when quarterly revenue gets close to $150 million, more than double the latest quarter's $70 million tally. Tellingly, though, they declined to predict when they might get there.

"We're confident with the growth engines we have and customers we've made that we will grow the revenue line to that number," said CEO Gary Smith in an interview Thursday. "Profit is an important milestone," the chief continued, "but we are also focused on how we will go beyond that."

Customers

Still, the company's clearly got a long way to go. Ciena offered a rather soft projection on fiscal 2004's first quarter, calling for growth of anywhere between nothing and 10%, depending on when customers accept their gear. And serving to further undercut the not-so-out-on-the-limb forecast, Ciena says gross margins will fall back to a 20% range after hitting 31% in the most recent quarter.

On the earnings conference call, analysts were also curious about the company's spike in product inventory. Ciena says it has about $14 million worth of equipment that has been shipped to buyers that awaits acceptance before it can be booked as revenue.

Though the executives declined to identify the soon-to-be buyers, some analysts speculate that the orders went to the federal government and the newly reorganized

MCI

. There is certainly

hope among investors that the government's so-called Gig BE project will line Ciena's pockets.

So on the one hand, Ciena's got plenty of cash and a chance to consolidate its gains if spending comes back. On the other hand, the stock has already surged this year even with sales holding to the flat line. There are those who wonder if merely emerging as one of the survivors is worth investors' hard-earned dollar.

"That still doesn't justify a $6 stock price," Blaylock's Lowy says.