Ciena's Shocking Plan: Back the Winners

At the UBS Warburg telecom conference, Ciena says its new-gear focus will allow it to ride out the telecom shakeout.
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Telecom's

slowdown story is now so well-chronicled that

Ciena

(CIEN) - Get Report

President and Chief Operating Officer Gary Smith prefers to talk subplot.

Big Show
Ciena rises despite Nasdaq pullback

What subplot? Well, the coming months and years are going to bring some winners and some losers in the network-building game, Smith said during a 30-minute presentation at Monday's

UBS Warburg Global Telecom Conference

at the Plaza Hotel in New York. The twist is that Ciena, which makes the optical transport and switching equipment that runs the fiber-optic Internet, is -- good choice! -- backing the winners.

Ciena makes this gutsy choice even as putting a positive spin on the telecom-equipment story becomes steadily more difficult, considering burgeoning network overcapacity and slowing capital spending. Observers note that the old-line telcos are cutting back on spending to offset plunging long-distance revenue,

a la

AT&T

(T) - Get Report

and

WorldCom

(WCOM)

, while upstart network builders such as

Williams

(WCG) - Get Report

have run up against budget shortfalls and financial difficulties. Meantime, questions are popping up all over about the viability of big-bandwidth providers, as

illustrated by closely held European telecommunications service company

iaxis

, which this summer filed for the equivalent of bankruptcy protection. After a 7% selloff in the morning, Ciena rebounded Monday to rise $5.59, or 6.2%, to $96.16.

New Stuff

Ciena isn't the least bit cowed by the conventional wisdom, which would seem to suggest that stocks priced at 453 times trailing 12 months earnings are possibly vulnerable. Instead, the company contends that the dynamics of the industry favor an optical pure-play like Ciena over its much-bigger rivals, such as

Nortel

(NT)

,

Lucent

(LU)

and

Alcatel

(ALA)

, because the latter are saddled with dying old-line business lines and withering customers.

Outperforming
Ciena vs. other big equipment firms

"People can't keep spending capital on this old stuff," Smith said Monday in a postpresentation interview. "They need to move to the new stuff, and we are incredibly well-placed there."

Answering questions raised by revenue-growth slowdowns at the likes of Nortel in recent months, Smith said Ciena's "visibility" on demand has improved in the past six months to a year, amid the shift to Internet-style networks from older voice-based networks.

Cracked Rearview?

Glossing over evidence of a

spending pullback, Smith bolstered his pitch by pointing to industry spending charts for 1998 and 1999, the glory days of capital spending. Even so, some investors on hand remained skeptical. One buyside international equities analyst said that while optical stocks have fallen sharply in the last month or so, he couldn't call this the bottom. The looming problem? "There are too many deadbeat carriers out there right now," the analyst said.

Smith countered that selling telecom equipment has always been a "lumpy business"; he explained that network builders tend to do big builds, then slow down. That's why it's important to have a diversified customer base, the executive said, noting the 40 customers Ciena counts as its own.

Indeed, that is impressive. But what remains to be seen is whether those customers will keep buying at the frequency and price level Ciena investors have grown accustomed to.