Tech stocks having regained a bit of their luster of late, investors anxiously await a progress report on one of the communications sector's bolder strategic gambles -- Ciena's (CIEN) - Get Report decision to keep spending as peers pare back.
As the Linthicum, Md., optical gearmaker presents second-quarter financial results Thursday morning, Wall Street will be listening for cues suggesting that the company's stay-the-course plan is paying off. Of particular interest will be details of the hard-won
contract and clues about potential future acquisitions.
Unlike its hobbled rivals
, which have been waging a desperate race to shrink into a shrinking market, Ciena has taken a damn-the-red-ink approach in
continuing to push for expansion. Ciena's nearly $2 billion in cash and investors' faith in its technology have helped the upstart acquire smaller competitors like
, giving Ciena some compelling products beyond its core optical switching market.
As demand for optical gear began to dry up in recent years, Ciena opted to pursue other product markets rather than go down with the fiber-optic ship. "It's not a bad strategy from a management point of view," says J.P. Morgan Chase analyst Ehud Gelblum, who has a sell rating on the stock.
While no one's been getting rich buying Ciena stock lately, neither have the risks of the cash-incinerating plan pushed investors into mass flight. After an abysmal drop from their triple-digit highs of late 2000, Ciena shares have doubled off October's all-time low of $2.41. The stock rose 23 cents, or 5%, to $5.27 in midday trading Wednesday.
Chutes and Ladders
Ciena executives have made it clear that they are willing to take on several quarters of
losses to ascend the networking-supplier ladder. But critics haven't been nearly as comfortable with the gushing red ink. They point out that the company's quarterly break-even revenue level is $200 million -- roughly three times recent sales levels.
Though it would be difficult, J.P. Morgan Chase's Gelblum says Ciena could pursue two goals at the same time by trimming expenses as it acquires and expands.
"They can probably cut costs and not have to cut too many employees," says Gelblum, who points to a chance that research-and-development costs could come down as the company buys additional struggling rivals. He also says there may be room to squeeze some of Ciena's $100 million in annual sales and marketing expenses.
The company is expected to post a second-quarter loss of 12 cents a share on sales of $72 million, according to a Multex tally. That is nearly the same as the first quarter, which showed an 11-cent loss on sales of $70 million, and compares to a 19-cent loss on $87 million in revenue for the year-ago period.
Investors may be slightly disappointed if they discover that the recent contract announcement with British Telecom is something other than a revenue jackpot. Some analysts had valued the three-year equipment deal as high as $200 million, but Gelblum's estimate is roughly $65 million.
Though perhaps less lucrative than first guessed, this still leaves fans with reason to cheer the first of what could be the start of a few key contract wins with Europe's top telcos.