Ciena Posts Smaller Loss, Sees Sales Rebounding

Byline: Yuki Noguchi

Ciena Corp.'s sales continue to flag, but the fiber-optic equipment firm said it is taking steps to mitigate some of the financial pain the last year has inflicted on its business.

"This is a dislocation in the industry that's going on; it's not business as usual," said Gary B. Smith, Ciena's president and chief executive. "Clearly, the environment we're in right now is a very challenging one," but the company invested $62 million -- more than its revenues -- in researching and developing new products during the quarter, and it is repurchasing some of its debt because it believes in its long-term future, he said.

The company lost $754.7 million ($1.75 a share), on revenues of $61.9 million during its fourth quarter ended Oct. 31. It was a grim year for the entire fiber-optics industry, which demolished sales for companies like Ciena, which last year sold $367.8 million of goods, and lost $1.8 billion ($5.51 a share) over the same period. Ciena's sales declined 78 percent during the last year, as its customers continued to cut back on spending to build the networks for which Ciena supplies networking equipment.

During the quarter just past, Ciena bought back some of its debt that will save $21.9 million in future principal payments, and is looking to repurchase an additional $202.9 million in notes that will save about $28.4 million in future payments.

Analysts have been criticizing the Linthicum-based firm for spending too much money, losing focus by trying to develop too many products, and ceding its technical advantages to its competitors, they said.

Earlier this month, both Merrill Lynch and market-research firm Communications Industry Researchers issued criticisms of the company, citing the company's inability to land large contracts, and its attempts to create new divisions of business that don't play to its strengths.

The company has cut its staff by 1,700 people in the last year, but it continues to burn cash at a rate analysts believe is too high; it used up $100 million of its cash during the quarter. The company now employs 2,100 people, but each employee is bringing in only $90,000 in annual revenue, compared to nearly $300,000 per employee by Ciena's rivals, according to CIR's report.

"Ciena's [research and development] costs are high because productivity is exceptionally low," CIR said in its report. "The only rational solution for Ciena is to retreat to a more focused product strategy, so that it can keep its development spending to a reasonable level and use a higher percentage of expenditure on its key products such as its optical switch."

That optical switch, which is used to transmit data at very high speeds over long distances on a fiber-optic network, is Ciena's star product.

Within three years of its founding in 1993, Ciena managed to create an entire market for that device, which could increase the capacity of a network 16-fold, by splitting a single fiber to create 16 different channels. The long-haul optical switch catapulted Ciena into the telecommunications scene, and spawned an entire fiber-optics industry in the Washington area.

For Sprint Corp., Ciena's earliest customer, it was a revolutionary breakthrough, because it obviated the need to build new networks. Much larger rivals like Lucent Technologies Inc. and Nortel Networks Corp. struggled to catch up.

Since this spring, Ciena started to lose its creative edge, said Mark Lutkowitz, an analyst and the author of the scathing CIR report issued last week.

"A lot of the moves that Ciena makes is playing with fire," developing new products and spending its limited human resources to chase different types of businesses. "It's one thing after the other, without focusing on long-haul. In a funny sort of way, if they had remained focused, maybe they would be better off."

Smith defends his company's strategy.

"We are incredibly focused without strategy since we started this downturn," he said. "Customers want less vendors and a broader product line. The world has moved on; you've got to move with it."

COPYRIGHT 2002 Washingtonpost Newsweek Interactive
COPYRIGHT 2003 Gale Group