Ciena loss narrows as sales soar 38% in 3Q

Linthicum firm sets 1-for-7 reverse split

September 01, 2006|By Stacey Hirsh | Stacey Hirsh,Sun reporter

Ciena Corp., the Linthicum telecommunications equipment company, reported yesterday that revenue increased and its loss narrowed in the third quarter, and said it planned to implement a 1-for-7 reverse stock split later this month.

The company also issued fourth-quarter earnings estimates that analysts said may have disappointed investors and driven the stock price down as much as 10 percent during trading. Shares of Ciena closed at $3.95, down 36 cents or 8.35 percent.

"I think to some degree today's trading of the stock conflicts with a good quarter," said Simon M. Leopold, a senior vice president at Morgan Keegan & Co. Inc. who follows Ciena and does not own shares.

The company reported a net loss of $4.3 million, or a penny a share, for the fiscal quarter that ended July 31, compared with a net loss of $51 million, or 9 cents per share, for the corresponding quarter last year.

When the numbers were adjusted to exclude stock compensation, legal fees and other costs, Ciena posted its second consecutive profitable quarter. The company's adjusted earnings were $13.6 million, or 2 cents per share.

Ciena's revenue increased 38 percent on a year-over-year basis for the third quarter. Revenue was $152.5 million, compared with $110.5 million for the third quarter last year. The revenue figures represent Ciena's 10th consecutive quarter of revenue growth, said Gary B. Smith, the company's chief executive and president.

Smith said profitability under generally accepted accounting principles required by government regulators is an achievable "near-term" milestone for the company, though he would not say exactly when the company expects to reach that goal.

"We're very encouraged by the progress we've made, and we're encouraged by the market dynamics we see that play to a lot of the investments and innovations that we've made," Smith said.

Ciena was once a high-flying company of the tech boom. Its initial public offering in February 1997 gave Ciena the highest first-day value at that time for a venture-backed startup. The company had nearly 4,000 employees during the boom and a stock price that hit $149.50 in October 2000.

But when the bubble burst, Ciena suffered several rounds of layoffs and saw its 2001 losses reaching $1.8 billion. Its comeback strategy has been to grow its product line through acquisitions.

Over the past five years, Ciena acquired six telecommunications companies in deals valued at more than $2.1 billion. In March, Ciena had about 1,500 employees, including about 600 in the Baltimore area.

Ciena said yesterday that it expects its fourth-quarter earnings, after adjustments from the stock split, to be between 10 cents and 12 cents per share. If the third quarter's adjusted numbers reflected the split, the earnings would be 15 cents per share, inferring a sequential decline, Leopold said.

The reverse split will become effective after the market closes Sept. 22, Ciena said. It will mean that the number of Ciena's outstanding shares will decrease sevenfold, but each share will be worth seven times its current value.

Reverse splits are not substantive changes for a company and do not raise additional capital or change the market value of the firm, said Gary Gray, a visiting professor of finance at Pennsylvania State University's Smeal College of Business. It is simply a way to change the share price, Gray said.

"Often it's just window dressing, and it's just to get share prices more in the area or the level at which companies want it to trade," Gray said.

Ciena said the purpose of its reverse split is to increase share price and attract "a broader range of investors." Smith said the company hoped to attract larger fund investors.

Companies occasionally implement reverse stock splits because of concerns that large institutional investors will not invest in stocks with a single-digit price, said Steven Norwitz, a spokesman for T. Rowe Price.

Some institutional investors may even have guidelines that prevent them from investing in stocks with single-digit prices because it's too risky, said Norwitz, adding that Price does not have any restrictions on investing in companies at certain prices.

"We don't really put any credence in any kind of stock split because it really doesn't change the business fundamentals of the company," Norwitz said.

Fidelity International Ltd. and Morgan Stanley are already Ciena shareholders, according to filings with the Securities and Exchange Commission. Some large hedge funds also invest in Ciena, said Joseph Chiasson, a telecommunications analyst for Susquehanna Financial Group in Boston who does not own Ciena shares.

Analysts said Ciena's reverse split was likely an indicator that the company felt secure in its sales trends. Chiasson said the action "should be perceived that management feels pretty comfortable they've got things back to a pretty stable footing."

Ciena also said yesterday that Bruce L. Clafin, the former president and CEO of 3Com Corp., a telecom company in Marlborough, Mass., has been named to its board of directors.

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