Thursday, June 02, 2005

Why CIEN can't get it right

CIEN reported earnings this morning and results were better than expected by sell-siders. Guidance was actually in line but gross margins are expected to increase next quarter. The issue with CIEN is that it has spent millions on buying numerous companies in past year or two to get it self out of the optical business and all that money hasn't really delivered. CIEN bought companies for storage infrastructure, for Enterprise market for addressing the access market but none of these have really lived up to expectations. Case in point is Catena that after being bought over a year ago is still delivering the $25M/qtr goal expected at the time of acquisition. CIEN still gets over 60% of its revenues from Optical equipment, which doesn't carry the 40%+ gross margin management expects to achieve sometime in future, they won't put a date on this goal..nice to have a moving target I suppose. CIEN also gets 12% of revenues from services which also carry very dismal gross margins. With all that money spent in buying companies which has led to growing operating expenses this company can not get a handle on cash burn. There is no imminent threat to liquidity but it points to the real issue with CIEN, the issue of unprofitable revenue growth coupled with bloated infrastructure. Company expects to be profitable at $150M/qtr revenue run-rate at 40%+ gross margins. Call me a pessimist, but that goal is good 50% away from recently quarter's revenue run rate and we all know optical business has great tendency to be very lumpy. And the gross margin goal of 40%+, well that is a long shot away also. I would like to see more cost reductions at CIEN, especially in R&D and G&A and revenue growth from acquired companies that sell non-optical products with higher gorss margins. But I am not holding my breath for this to happen any time soon, my model says they can't get to $150M run rate for over a year and 40% gross margin won't make them profitable unless they cut expenses. With the recent run in the stock ahead of earnings I wouldnt' be surprised to see people leave this train on its own.

Note: the 40%+ gross margin expectations could be easier to achieve if the recently signed agreement with Broadwing for $35M in cash lets CIEN account for those payments as product revenues with essentially 100% gross margin. Let me know if you want clarification on this "Fuzzy math".


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