Ciena Sheds Last Fans in Warning

The networker's remaining Wall Street allies throw in the towel on the sputtering company.
Author:
Publish date:

With its latest

sales debacle,

Ciena

(CIEN) - Get Report

has sent its few remaining fans packing.

The optical networker warned late Tuesday of weak demand for its main optical networking gear and a slowdown in sales of its new products. Ciena said third-quarter sales would come in more than 20% below the Wall Street consensus estimate.

On Wednesday morning, the stock plunged 23% amid a wave of downgrades from analysts who had persisted in sitting on the fence even as previous setbacks buffeted the company. At long last, these Wall Streeters are ready to concede that Ciena's late-to-the-game acquisition strategy isn't working out. Shares of the Linthicum, Md., telecom equipment shop fell 63 cents to $2.12.

At least two analysts downgraded the stock to sell from neutral Wednesday in the wake of the preannouncement. CIBC's Steve Kamman and J.P. Morgan Chase analyst Ehud Gelblum both gave up hope that Ciena's controversial acquisition strategy, adopted after the company spent years emphasizing its specialized optical focus, would turn the business around.

"We expect Ciena to continue pursuing acquisitions, with further risk of dilution and a diminishing probability of returns on the deals," Kamman writes.

After the market's close Tuesday, Ciena forecast third-quarter sales of $75 million. Analysts had expected a $95 million top line. The company also said that factoring in all costs, it would lose 25 cents a share. Excluding one-time charges, Ciena predicted it would lose 7 or 8 cents a share during the quarter, an estimate that is in line with the Thomson First Call estimate. A year ago, the company lost 9 cents a share on that basis.

The third straight sales shortfall provided J.P. Morgan's Gelblum with enough evidence that an upside surprise probably isn't likely for Ciena.

"After holding out hope over the last few preannouncements that revenue and margin would turn back up again, we are finally and regretfully throwing in the towel and downgrading Ciena," writes Gelblum.

Analysts also saw disturbing trends in the company's cash use. The combination of increased cash burn and dilution of the stock from recent acquisitions have pressured the company's piggy bank.

"This implies that the cushion supporting the stock could well be even lower," Gelblum writes in his report Monday.

Ciena's woes underscore not just the sluggish recovery of the equipment industry, but also the continued weakness of the telecom sector, which is beset by price wars and soft demand.

Outfits such as

Lucent

(LU)

and

Tellabs

(TLAB)

are merely treading water on the old-line phone equipment sales front. That's because with big telcos intent on pinching pennies, buying trends have shifted toward Internet gear peddled by

Juniper

(JNPR) - Get Report

and

Cisco

(CSCO) - Get Report

.

Ciena has

tried to sidestep the collapse of its core optical networking business by acquiring companies that are focused on more popular segments of the market. Growth niches such as access devices have been in demand as phone companies look to merge various types of local traffic onto larger networks.

But to date, Ciena's addition of these so-called multifunction box makers like Wavesmith and Catena have not paid off.

"Given this track record, we can no longer give Ciena the benefit of the doubt on mergers and acquisitions," CIBC's Kamman writes.