- The Washington Times - Monday, March 12, 2007

Shares of Ciena Corp. plunged earlier this month when the Linthicum, Md., manufacturer of network equipment made a second-quarter forecast below analysts’ estimates.

The stock has sunk 19 percent since it announced first-quarter results on March 1, along with a forecast of 14 cents per share for the second quarter, well behind estimates of 21 cents as compiled by Bloomberg News.

Ciena, which sells optical transport and switching equipment to global carriers, said research-and-development costs will grow next quarter, but cited the first quarter’s profits as evidence its strategy is working.

During the three months ended Jan. 31, the company posted its second quarterly profit in five years: $11.1 million (12 cents per diluted share), compared with a loss of $6.3 million (8 cents) a year ago.

“With our quarter-one results, we feel like we’re off to a good start for 2007,” Chief Executive Officer Gary Smith said on a conference call. “We’re pleased with the increasing alignment we see between our portfolio and where our customers are headed with their networks.”

The company’s first-quarter revenues grew 37 percent over last year’s first quarter to $165.1 million.

The company’s bottom line has improved as telecommunications giants like Verizon Communications and BT Group (formerly British Telecommunications) overhaul their networks to support faster Internet speeds as well as their entrance into the television market.

However, Merrill Lynch analyst Tal Liani noted that Ciena’s contract with BT involves low-margin installation services, which he said factored into the company’s disappointing gross margin in the services sector, which fell from 29.5 percent to 16.1 percent.

Analysts also expressed concern over Ciena’s operating expenses, which exceeded analyst estimates of $61 million by more than $1 million.

“Ciena’s base of Tier 1 customers like BT and Verizon, while impressive, also places substantial and frequent demands on R&D; (research and development) expenses,” said Mr. Liani, whose company has a financial relationship with Ciena.

However, Ciena’s Mr. Smith said he expects research costs to decline as a percentage of revenues — while increasing in overall dollars — this year.

“At this point, we see opportunities that we believe warrant additional [research] investment over the balance of the year,” he said, crediting the company’s return to profitability on investments as opposed to cost-cutting.

During the quarter, the company added about 100 new employees as it ramps up a new facility in India, which is expected to pressure second-quarter operating margins.

Mr. Smith said “the lines are blurring” between traditional service providers and new entrants, “which we believe translates into growth opportunities for Ciena.”

Still, analysts continue to be skeptical. According to Bloomberg, nine have a “buy” rating, 10 have “hold” and one rates the stock as a “sell.”

Shares of Ciena closed down 9 cents yesterday at $26.41 on Nasdaq.

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