Ciena Gaining Ground on Its Peers

Contracts with European telcos and the Defense Department could restore sales at the optical gearmaker.
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The optical gearmaker waxes optimistic despite its immersion in red ink.

To listen to its ace message-spinner,

Ciena

(CIEN) - Get Report

will soon be reaching back for a little something extra.

Strategy chief Steve Chaddick dropped by recently. In New York for some press engagements, he tossed out a spiel emphasizing that Ciena's wide-ranging optical expertise extends to places like the network's edge -- just the place, as luck would have it, where the big phone companies happen to be toiling now.

Hey, it's a good pitch -- but like anyone familiar with the scouting report on Ciena, I was taking all the way. I'll spare you the play-by-play, but Chaddick did field some questions about the company's relationship with some big European telcos, possible contributions from the WaveSmith acquisition and opportunities in the Defense Department's big networking project.

For the most part, my patience was rewarded. Chaddick's comments suggest that the Linthicum, Md., company is now gaining ground in areas where some peers have stumbled badly -- a potentially important message for the many investors who wisely abandoned the stock as the era of big optical spending drew to a close.

It's no surprise that Ciena's message hurlers like to offer up the new-and-improved story. It certainly helps to draw attention away from the fact that the company is still stuck in the dying long-haul optical business that it has been championing for years.

Ciena's bold insistence that it can spend its way to growth, rather than cutting its way to profits, has alienated many on Wall Street. If it weren't for its $1.8 billion in cash, the Ciena story would no doubt alarm investors even more, considering the company's quarterly break-even revenue point remains three times recent sales levels of around $70 million.

While there's nothing on deck to immediately restore the sales glories of old, Chaddick said he was encouraged by the progress he was seeing in Europe. On the heels of winning

British Telecom's

(BTY)

business for a whole array of optical gear, in a three-year contract that a J.P. Morgan Chase analyst values at nearly $200 million, Ciena appears to be crossing its fingers and hoping to pull off a similar deal with

Deutsche Telekom

(DT) - Get Report

.

Chaddick says it's too early to tell, but he pointedly added that Ciena's top salesman -- the closer, if you will -- was in Germany recently, working with Deutsche Telekom.

On WaveSmith, the networking outfit Ciena agreed to buy in April, Chaddick was especially pumped. The combination of Ciena's broader sales effort with WaveSmith's popular networking box that helps merge data traffic onto phone pathways will prove to be even more of a winner than planned, says the executive.

"We will have bigger revenue in 2004 from WaveSmith than we originally expected," says Chaddick. Local phone giant

SBC

(SBC)

is a WaveSmith customer and new to Ciena. Chaddick says he expects similar success with

Verizon

(VZ) - Get Report

, the nation's largest phone company.

Another 2004 revenue event that could make a big news splash later this year is the $5 billion, three-year global network construction plan called Global Information Grid Bandwidth Expansion, or GIG-BE for short.

Tech Edge

readers may recall the Nov. 26 issue, "Uncle Sam Needs Switches," which provided an early heads-up on the project.

Chaddick says Ciena is in the running for three of the four major pieces of the job. The optical transport portion is a good fit for Ciena, but provides slim gross margins in the 25% range. The other two portions -- edge and core switching -- are in Ciena's sweet spot, yielding better than 50% margins.

Most observers see Ciena as the favorite in switching. Chaddick didn't disagree. He expects the federal contract announcements to come this fall.

If he's right, Ciena investors could end up hailing Chaddick as their Mr. October.