Ciena's estimate staggers its stock Shares fall 24% on earnings preview

August 15, 1998|By Mark Ribbing | Mark Ribbing,SUN STAFF

One week before shareholders are scheduled to vote on its sale, Ciena Corp.'s shares dived 24 percent yesterday after the Linthicum-based telecommunications equipment company said it expects fiscal third-quarter earnings to be far lower than Wall Street had anticipated.

The fall came at a sensitive moment for Ciena: The company agreed June 2 to be acquired by Tellabs Inc. of Lisle, Ill., in a stock swap initially valued at about $7 billion. Shareholders of the two companies will vote on the deal Friday.

Ciena shares closed yesterday at $54.125, down $17.0625. Its tumble took Tellabs with it, dragging that company's shares to $58.125, down $13.6875.

Analysts said Ciena's problems could make Tellabs shareholders less willing to support the acquisition but that the deal is still likely to win approval.

Tellabs officials said they still firmly favor the acquisition. "We're still absolutely on track here, no hesitancy whatsoever," said Tellabs President and Chief Executive Officer Michael J. Birck.

Both companies' boards met Thursday and affirmed their support of the deal.

Ciena shocked analysts yesterday by announcing that it expects quarterly earnings of 13 to 15 cents per share, excluding special charges. That would be far lower than the 31 to 33 cents per share that analysts had predicted. It would also be lower than the 34 cents a share that the company earned in the third quarter last year.

Price concessions

The company said it had made price concessions to one of its customers in return for purchase commitments. Ciena would not identify the customer directly, but it almost certainly is Sprint Corp. Ciena said another customer has delayed a $25 million order. Again, the customer was not identified. WorldCom Inc., Ciena's other major customer, has a history of delaying its Ciena orders.

Such reversals are all the more painful to Ciena because of its reliance on a small number of customers. Together, Sprint and WorldCom accounted for 97 percent of Ciena's fiscal 1997 revenue.

Ciena President and CEO Patrick H. Nettles called the disappointing numbers "an artifact of timing," saying that Ciena's earnings were thrown off in part by the switch from Ciena's traditional fiscal-year reporting cycle to a calendar-year system that Tellabs favors.

'Very strong prospects'

Nettles said Ciena's market position remains sound. "We have very strong prospects," he said. "Last quarter we had twice as many customers as the previous quarter."

Nettles said he does not expect the reversals to affect jobs at Ciena, which has about 1,000 employees.

Ciena said it foresaw revenue of about $129 million for the quarter, which ended Aug. 1. That would be 5.9 percent more than in the same quarter last year.

The steep plunge in Ciena's stock price has at least temporarily changed the financial dynamics of the Tellabs-Ciena deal. The two companies had agreed that the shares of the two companies would be swapped one-for-one, with each Ciena stock holding the same value as a Tellabs stock.

In the weeks after the announcement of the acquisition, the value of the shares of the companies remained more or less equal.

Now, a disparity has opened up between the prices. Based on yesterday's closing prices, a Ciena share is worth .93 of a Tellabs share.

In other words, Tellabs shareholders would be getting a bit less than they had anticipated, at least in the short term.

Analysts were guardedly optimistic that the deal will be approved. "Yes, it's in danger. Does it go through? Yes, it does," said Joe Noel, an analyst at Hambrecht & Quist LLC in San Francisco.

Ciena is a fast-growing maker of equipment that expands the number of phone calls and Internet messages a network can handle. The older, larger Tellabs makes gear that manages calls as they travel along a network.

"Tellabs wants to upgrade its product base; that's the reason this goes through," Noel said.

In addition, analysts said, Tellabs shareholders are inclined to defer to the company's management, which has led Tellabs through a period of impressive growth and consistency.

"Tellabs has been a very strong performer over the years," said Tom Burnett, director of Merger Insight, a New York-based investment research firm. "I think they'll go along with the board and the management that got them there."

Because of its planned acquisition, Ciena had not originally intended to put out independent financial numbers. However, the information about Ciena's earnings is material to the acquisition, so the figures were released. "We felt we had no choice but to give the information to the shareholders," Nettles said.

If the acquisition is approved, the combined company will release full third-quarter results in October.

Pub Date: 8/15/98

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