Ciena Takes a Verbal Swipe at Lucent's Tactics

In an SEC filing, Ciena gripes about Lucent's early product announcements and their impact on Ciena's business.
Author:
Publish date:

Plain English can be a little harsh when you're describing a competitor.

At least when it comes to

Ciena's

(CIEN) - Get Report

grudge against

Lucent

(LU)

.

In a filing with the

Securities and Exchange Commission

Monday, Ciena, using the "plain English" now urged by regulators, openly raises the possibility that Lucent may have been less than truthful in its claims to deliver equipment on time.

This feud goes back to last summer when the Linthicum, Md.-based supplier of optical-fiber systems was left at the altar by prospective merger partner

Tellabs

(TLAB)

. Tellabs backed out after

AT&T

(T) - Get Report

canceled a potentially lucrative contract with Ciena and gave it to Lucent.

Since then, Ciena has raised questions about Lucent's competitive tactics. In an SEC filing in September, Ciena wrote that it was investigating potentially damaging and "legally questionable" activities by competitors. Nothing came of that investigation.

The most recent issue hinges on a Lucent product announcement released in January 1998. In Monday's 8K filing, Ciena took the unusual step of questioning the truthfulness of Lucent marketing, this type in sharper language than it's used to criticize its rival in the past.

"When competitors make early announcements of competing products, our customers may delay their purchasing decisions, particularly if they believe the truth of the claimed performance of the announced product, and the time within which it will be available," the document reads.

"For example, in January, 1998, Lucent announced a proposed high-capacity

dense wavelength division multiplexing system which it claimed would handle 400

gigabits per second of capacity per fiber, and which it further claimed would be commercially available worldwide in the fourth quarter of 1998."

The document leaves the rest unsaid: that Lucent made its products commercially available on April 1, three months behind its prediction in the press release. A Lucent official says it was ahead of schedule in delivering product to AT&T and other unnamed customers; already 13 carriers have received shipments.

A Ciena official says Monday's documents simply restate the content of prior filings. But observers say Ciena's word choice breaks with protocol.

"I can't say that I've ever seen anyone take this blatant a swipe at a competitor in this way before," says one securities attorney, who asked not to be named.

"It signals that there may be some friction," says Mort Cohen, chairman of

Clarion Partners

, which isn't an investor in Ciena or Lucent. "It's a red flag."

But you have to score a few extra points for candor.

"That's a great example of plain English," says analyst Kevin Slocum with

SoundView

, adding that Ciena's version of the episode was accurate. Slocum rates the stock a hold; his firm has no banking relationship with Ciena.

Ciena started a technological race in 1996 when it shipped the first system capable of packing 16 "channels" of light onto an optical fiber, offering phone companies a way to ease network capacity strains. Lucent,

Alcatel

(ALA)

and other established telecom suppliers hustled to match the upstart.

Ciena quickly scaled to 40 channels, but its stock plunged the day Lucent announced an 80-channel product in January 1998.

Lucent says its announcement of the 80-channel product caused no disruption in the optical industry. But Slocum and other industry experts say it used a strategy long practiced by the likes of

IBM

(IBM) - Get Report

: "freezing" a market, or announcing a product long before it is ready. The intention is to convince customers not to flock to a competitor's offering.

Ciena has a complicated relationship with Lucent, because it is the sole supplier of two chips used in Ciena's optical products. Ciena relies on other rivals such as Alcatel and

Nortel

(NT)

for laser components. Mike Margolies, president of the independent analyst shop

Avalon Research

, says Ciena might stress that relationship by sniping at it in SEC documents.

"The competitive risk is that there's obviously increased hostility or noise between these two companies," says Margolies, who recommends selling Ciena shares.