Ciena Net Falls, Outlook Mediocre

CHICAGO – Communications equipment maker Ciena Corp. said on Thursday its fiscal third-quarter net profits slumped after accounting for almost $100 million in one-time items, but its operating results doubled thanks to strong demand for its next-generation optical gear.

The Linthicum, Maryland-based company, which makes equipment that increases the capacity of fiber-optic telecom networks, said net income after one-time items fell to $5.65 million, or 2 cents a share, from $28.16 million, or 10 cents a share, last year.

The net results included $75.64 million for amortization of goodwill, $22.23 million in deferred stock compensation charges, $1.38 million for amortization of intangible assets and $507,000 for payroll taxes on stock option exercises. Also included was a $6.58 million benefit from receipt of a previously written-down receivable.

Excluding the one-time charges, Ciena's operating results surged to $58 million, or 17 cents a share, in the quarter ended July 31, from $28.8 million, or 10 cents a share, in the same period last year.

Analysts had expected Ciena to earn 16 cents a share, in a range of 11 cents to 19 cents, according to market research firm Thomson Financial/First Call.

Revenues surged 96 percent to $458.1 million from $233.3 million last year.

However, analysts were concerned that Ciena's third-quarter gross margin fell more than two percentage points from the previous quarter, a larger drop than the company had indicated would occur.

In May, Ciena said ``desperate pricing tactics'' from competitors could squeeze third-quarter gross margins by one percentage point from the second-quarter rate of 45.6 percent.

``There's no reason to believe next quarter will be better,'' Ariane Mahler, an analyst with Dresdner Kleinwort Wasserstein, said of the gross margin.

Nikos Theodosopoulos, a UBS Warburg analyst who slashed his Ciena estimates on Monday, said the gross margin decline suggests more estimate cuts will follow.

``The whole industry is in a bit of a tough time right now,'' he said.

Ciena officials sounded more upbeat about their prospects.

``The past year has been a challenging one for the industry, but seismic shifts in technology have historically caused market turmoil,'' Ciena President and Chief Executive Gary Smith said 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.''

He added that while the market is likely to show continued slowdown over the next year, Ciena believes demand for its next-generation fiber-optic products will allow the company to take business from competitors that make more traditional gear. The company said it added six customers in the quarter.

Ciena's success has been driven in part by demand for CoreDirector, its optical switch that can adapt to handle changing network capacity needs, analysts said.

Ciena's results have remained strong amid the slowdown as carriers continue to spend for Ciena's next-generation gear to help them cut costs, analysts said.

Other tech giants, including Cisco Systems Inc. (Nasdaq:CSCO - news), Lucent Technologies Inc. (NYSE:LU - news), JDS Uniphase Corp. (Nasdaq:JDSU - news) (JDU.TO) and Nortel Networks Corp. (NT.TO)(NYSE:NT - news), have slashed jobs and reported losses as customers have curtailed spending.

The company's shares closed off $1.28, or 4.4 percent, at $28.12 in Wednesday trading on the Nasdaq. Over the past year, the stock has outperformed its peer group in the American Stock Exchange Networking index by about 36 percent.

In May, the company left its forecast for adjusted earnings per share in the 2001 fiscal year unchanged at 72 to 75 cents, compared with analysts' consensus estimate of 73 cents. It estimated revenue growth of 95 percent to 105 percent.

Ciena also said in May that fiscal 2002 revenues were expected to grow 45 percent to 65 percent, in line with analysts' estimates.

The optical networking company provided no guidance for future financial results on Thursday.

The company said its total revenue-generating optical networking equipment customer base now totals 55, of which 45 contributed to revenues during the third quarter. In addition, sales of the CoreDirector switch topped 10 percent of total revenue for the third quarter in a row. CoreDirector sales increased 20 percent over the previous quarter.

But Ciena said Jesus Leon, senior vice president of the company's metro transport division, would assume leadership of the Metro Switching Division. He replaces Alnoor Shivji, who the company said left to pursue other interests.