Acquisitive Ciena finds its `market sweet spot'

Network company Ciena finds itself in `market sweet spot'

June 01, 2007|By Tricia Bishop | Tricia Bishop,Sun reporter

Bandwidth, everybody wants it - more of it - now.

There are television shows to watch online, huge files to download and a host of companies looking to expand their businesses. The key to making much of that run smoothly, it seems, is bandwidth, because the more of it you have, the more information you can move across a network.

And Linthicum's Ciena Corp., which makes computer-networking equipment, just happens to sell the technology that creates it.

That's put the formerly struggling technology company in a "market sweet spot" right now, Chief Executive Officer Gary B. Smith said during a conference call yesterday to discuss earnings for the fiscal second quarter, which ended April 30.

Ciena's revenue was up 47 percent to $193.5 million from $131.2 million a year earlier.

And income for the three-month period was up to $13 million compared with a loss of $1.9 million in the corresponding quarter of 2006.

The results sent the company's stock up $5.04, about 17 percent, to $34.32. It was the fourth-most-advanced stock on the Nasdaq yesterday, and that - coupled with a string of profitable quarters - gave Smith the opportunity to boast a little without actually saying, "I told you so."

"Several years ago, we placed some strategic bets that our customers' networks would head in this direction," Smith said.

"Thus far, it looks like our bets are beginning to pay off," he added.

Back in the late 1990s, when investors acted as if they couldn't put enough money into tech companies, Ciena went public in a big way based on its business model of increasing the amount of data that fiber-optic cable could carry. The company had a value of $3.4 billion after its first day of stock trading Feb. 7, 1997, when shares closed at $37. By 2000, the stock price had soared to more than $149.

`Contrarian approach'

The company crashed with so many others after the dot-com bubble burst, however. Like its peers, Ciena's losses ballooned (to $1.8 billion in 2001) and staff members were laid off.

But unlike competitors, Ciena kept spending.

"When the telecom industry took its downturn, we took a relatively contrarian approach," said spokeswoman Nicole Anderson. "We did not necessarily slash and cut costs dramatically and wait it out. We made acquisitions."

Six of them to be exact, often at the expense of shareholders who had their stock diluted when Ciena offered more shares to pay for the companies it was buying. That strategy once frustrated investors and analysts, but it was lauded yesterday.

"They invested pretty aggressively during the downturn, and now they've got one of the better product portfolios," said Tim Daubenspeck, an analyst with Pacific Crest Securities in Connecticut. "The investment during the tough times is now starting to pay off."

Of Ciena's three business categories, the one that creates bandwidth brought in the most revenue for the quarter: $160 million, or 82 percent.

"It's called the YouTube effect," said Simon M. Leopold, an analyst with Morgan Keegan & Co. in New York. "Several years ago, people went online to just shop on Amazon[.com] or e-mail. Now they're watching video clips that suck up bandwidth."

That's made Ciena customers, companies like Qwest or Sprint, suddenly want to upgrade their networks, Smith said, summing it up this way: "Frankly, it seems as if the environment happens to align with what [Ciena is] good at."

Revenue makers

About 13 percent of Ciena's revenue came from a division that helps companies, including AT&T Inc. and Verizon Communications, deliver faster access on a smaller scale, to homes and small businesses. And 10 percent of the sales were from its global networking services, basically installation and maintenance the company offers to businesses starting to use its technology. That service area is one the company acknowledged it needs to work on to make profitable.

"Ciena really needs to improve its service gross margins," agreed analyst Mark Sue, who works with RBC Capital Markets in New York. But, he added, "You really have to hand it to the company for sticking through it through thick and thin over the last decade."

tricia.bishop@baltsun.com

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