Ciena falls victim to economic downturn

Ciena Corp., one of the only network equipment makers that has performed well through the economic slump, joined the ranks of struggling vendors by lowering its earnings and revenue forecasts on Thursday.

The Linthicum, Maryland-based company reported revenue of US$458.1 million for the third quarter, a gain of $33 million over the second quarter and nearly twice as much as the same period last year, and net income of $58 million.

But the overall picture was grim. Ciena Chief Executive Officer (CEO) Gary Smith said the company's fourth-quarter revenue is expected to drop by 12 percent to 20 percent, and that growth for 2002 will be "in the early teens," well short of the 85 percent to 90 percent growth that many analysts had predicted.

The dour forecast came as a disappointment to observers mollified by Ciena's recent ability to weather the tech storm. Recently, Ciena had been outperforming its peers in the American Stock Exchange's networking index by some 36 percent.

Dave Passmore, research director at the Burton Group in Sterling, Virginia, said Ciena had been able to outrun its competitors by offering stronger products.

"They had a product that actually worked," Passmore said, referring specifically to Ciena's long-haul DWDM (dense wave division multiplexing) and optical switching gear. "And it was available early enough that Ciena was able to take advantage of the long sales cycle that you typically find with service providers."

Ciena was simply caught up in the malaise that has been afflicting the entire network equipment industry, Passmore said. Service providers are now cutting back on spending because their networks are already more than sufficient, he added.

"There's definitely an overhang of equipment out there, and pure economics tells you that supply has exceeded demand," Passmore said. During the last year or so, there were multiple long-haul providers in North America that each decided to build big 40,000 to 60,000 route-mile networks. Their guidance at the time was, 'Build it and they will come. We'll worry about profitability later.' Now they're sitting there with underutilized infrastructures. They have a lot of fiber that's not lit, and the fiber that is lit is more than adequate to meet their current demand."

Other market watchers predicted that Ciena would intensify its sales efforts in the metropolitan market, rather than the long-haul market in which it has historically operated, largely because of a fiber glut in long-haul routes.

"The long-haul [market] is going down, which means Ciena's customer base must shift to the metro," said Maribel Dolinov, an analyst at Forrester Research in Cambridge, Mass.

Smith blamed Ciena's fall on a lack of spending, not a drying up of demand. Still, he sounded a note of optimism for the future.

"The past year has been a challenging one for the industry, but seismic shifts in technology have historically caused market turmoil," said Smith in a statement. "This market turmoil, in turn, sets the stage for new market leaders to emerge, and we believe Ciena is positioned to be one of these leaders."

Passmore agreed, noting that traffic demands will eventually rise again, causing service providers to resume buying equipment. But he also said that intense competition will drive many equipment makers out of business.

"It will be a matter of natural selection," Passmore said. "The good news for those that survive is that there will be fewer competitors to worry about. The next year could be pretty bleak, but some semblance of normalcy should return to the industry."

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