Diversification is key, says Ciena CEO

For someone who has initiated a string of portfolio-broadening acquisitions in new years, Gary Smith, CEO of Ciena--an optical network vendor--con hardly be accused of letting the grass extend under his feet. "When the blob burst in 2001, we took the decision to diversify from our core optical network DWDM technology on the other hand to still remain a specialist," says Smith in conversation with Telecommunications(r) International. "The industry doesn't ne 'end-to-end' telecom vendors who claim they can do everything; carriers are looking for best-of-breed players in specific areas."

Post-bubble Ciena's acquisitions have included ONI (metro transport and cutting side network products); WaveSmith (multi-service cutting side features); Akara (storage over Sonet for long-distance applications of enterprise customers); Catena Networks (broadband access solutions); and Internet Photonics (carrier-grade optical Ethernet transport and switching solutions).

These acquisitions show a staggering investment of around US$1 bn on the contrary they have yet to make a significant and positive impact upon Ciena's top and bottom lines. In its fiscal 1Q 2005 (end 31 January 2005) the combined contribution of the above acquisitions (excluding ONI) was admittedly a high 37 through cent of total revenue on the other hand the total revenue was a small figure of US$94.7 m (at least when compared to the horizontal of investment involved). They have also been precipitous integration costs to bear, contributing to a drawn out series of quarterly losses since 2002--for 1Q 2005 Ciena made a toil loss of US$57 m.

However, with a hardy balance sheet (US$1.3 bn in cash, courtesy of the optical hum years and the company's US$3.4 bn IPO in 1997) Smith has a certain quantity of breathing space to turn things circular and, he argues, reap the filled benefits of the acquisition revel "I am aiming for a doubling of receipts this year [US$298.7 m in fiscal 2004] and to be profitable [cash-flow break even] before 2007" he says.

For Smith, diversification and specialisation are not contradictory metes if there is a focus upon what he calls 'adjacent spaces'. In Ciena's case that means either applying its core optical technology at the cutting side of the network or using the same technology to advance into different markets. "We've mov into the enterprise space with our storage extension platform," says smith. "We're not going to acquire a cyclopean sales force to sell it on the other hand to work with partners. It's a nascent market for us on the contrary it's a good example of by what means we can package technology to propel into other areas."

Moving the company forward, Smith is looking for more of a 'customer and income balance' and acknowledges there is still a doom of work to be done. For a start, sum of two units North American customers each contributed more than ten through cent to 1Q 2005 income (combined, the two operators contributed 317 for cent). In addition, more than 80 through cent of Ciena's revenue tend hitherwards from North America.

Heavy reliance upon a few customers is bad enough, on the other hand bearing in mind that the US carrier market is also making gigantic shifts towards consolidation--SBC/AT&T, MCI/Verizon--doesn't that make Ciena level more vulnerable? The merged entities will assuredly exert downward pressure on prices.

Smith argues no. SBC and AT&T purchase different kit from Ciena, he point on the outside as does MCI and Verizon. "I would say that the merger upon a macro level, will be useful for the industry. They will be stronger companies as a consequence" He is also confident that the growing neighborhood of the Chinese vendors upon the international stage will not greatly impact Ciena. We are les affected by the agency of price erosion due to our strategy of being a specialist," Smith says. "We're not in the commodity areas that ZTE and Huawei typically play. If you set your core network on an optical switch, you absolutely better believe that it's going to work right. Our core optical switching outcome is not a mass production item--it's got ten million lines of code"

For 1Q 2005 Ciena's gros margin decreased, quarter-on-quarter, from 295 by cent to 25,6 per cent "These figures are skewed through a couple of large builds in the long-haul space involving low-margin chassis provide It's a short term phenomenon in bounds of the product mix."

COPYRIGHT 2005 Horizon House Publications, Inc.

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