Return to glory? Ciena has a plan

Technology: The downturn continues, but Ciena Corp. is attempting to position itself to prosper no matter what develops.

March 16, 2003|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

A picture on the wall in Gary B. Smith's office shows the Nasdaq building in Times Square draped with Ciena Corp.'s banners.

The picture wasn't taken during the high-flying days of the technology boom, when stock options flowed like champagne. It was snapped Jan. 11, 2002, long after Ciena and so many others had suffered huge layoffs and losses.

"It's been a tumultuous ride," said Smith, Ciena's president and chief executive officer.

The facade of telecommunications took hundreds of companies on the ride of a lifetime, bringing many of them to an abrupt end when the bottom fell out in 2001. But telecom remains a $400 billion a-year industry in the United States. And Ciena, a Linthicum-based company that makes equipment for fiber-optic networks, has plans to grab a larger share of that market even as it works to outlast the downturn.

The question is, will its plan work?

Ciena will continue investing in research and development while cutting costs overall. It plans to grow by selling more pieces to the information superhighway - a plan Smith outlined for shareholders at the company's annual meeting last week. Smith believes that the strategy is the only way to beat the economy, and some analysts agree.

But other analysts argue that Ciena should stick to what it knows best. They say morale is low at the firm and predict that more job cuts are on the way. And they sharply criticize Smith for taking a $3 million bonus this year as the business is struggling to get profitable again.

"It seems like they're just on a wild revenue chase and they're going to pick up any revenue they can get their hands on ... even if it jeopardizes the long-term health of the company," said David Gross, a senior analyst who covers optical networking for Communications Industry Researchers Inc.

Founded in 1994, Ciena was born a company that made equipment for long-haul networks, or networks that connect cities. It went public in 1997, and later acquired Lightera Networks Inc. and Cyras Systems Inc., adding to its portfolio products that are essentially the traffic controllers on the information superhighway. In June, Ciena expanded its line of products for networks in cities, known in the industry as metropolitan networks, by acquiring ONI Systems Corp.

Now, Ciena hopes to build on its foray into the metropolitan networks and expand on its existing products through continued investment, and Smith believes that the economic downturn gives Ciena an opportunity to break into new markets while some of its competitors are shrinking.

The worldwide market for optical equipment was $27 billion in 2000, 42 percent of which was sales for metropolitan networks. This year, the market is expected to be less than $8.3 billion, with 59 percent of it for metropolitan network products, according to Ciena estimates that it combined with industry analysis.

Ciena's strategy is to grow in three ways: expand what its equipment can do, so that its products can make telecom networks more flexible for data services, such as Ethernet, that traditionally required separate networks; sell packages of products to meet individual customer needs, rather than asking them to fit Ciena equipment into their networks; and strengthen its products for metropolitan areas and businesses.

"The strategy makes sense. The carriers that are most healthy today and the operators that do in fact need to upgrade regions of their networks are the local operators," said Robert Tango, an analyst with William Blair & Co., an investment firm in Chicago.

Ciena has a strong team of engineers and a good research and development department, Tango said. By extending into the local markets, the company is simply trying to draw on those resources, he said.

Analysts at Communications Industry Researchers paint a much bleaker picture. They disagree with Ciena's growth strategy, saying more products mean more competition, not necessarily more revenue. And the other markets Ciena is looking at have also declined, they said.

"This is a company that's being held hostage by this mentality that's just going in the absolute wrong direction, and it just doesn't make any sense," said Mark Lutkowitz, vice president of optical networking research for Communications Industry Researchers.

Some analysts say that Ciena - which used $43 million of its cash last quarter - is burning through too much cash each quarter. And they predict more job cuts at the company.

Smith said he would not rule out more layoffs.

Smith has come under some fire for accepting a $3 million bonus as the telecommunications industry struggles with cutbacks. Smith was promised the incentive bonus in 1999 if he remained with the company until August 2002, according to documents filed with the Securities and Exchange Commission.

He received the bonus in August, the documents said.

Smith declined to comment on the bonus.

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