Ciena’s optical business snowballs

Ciena beat the expectations of Wall Street analysts today, reporting $165 million in fiscal-first-quarter revenue when the street expected $164 million. But its quarterly earnings, at $0.22 per share, were below the street consensus of $0.23, the result of a lot of low-margin installation services Ciena performed in the quarter.

Driven by long-haul transport activity, revenue from Ciena’s optical networking group was up nearly 7% sequentially to more than $127 million in the quarter ending in January. But revenue from its broadband networking group fell 31% sequentially to more than $9 million, and revenue from its data group stayed flat at nearly $5 million.

Ciena’s optical business continues to contribute an increasingly large percentage of its revenue: 77% in the first fiscal quarter, 74% in the previous quarter, 67% and 63% before that.

Asked on a conference call today whether Ciena’s data products were being cannibalized by its other products, Chief Technology Officer Stephen Alexander said, “What you’re seeing now is the convergence of the two worlds. The way to get high bandwidth is to go optical. So if your data is being carried optically, is that a data product or an optical product?”

Ciena is participating in “larger, more turnkey deployments” these days, making revenue lumpier and harder to predict for a given quarter, Chief Financial Officer Joe Chinnici said, predicting a 5% to 10% sequential increase in fiscal-second-quarter revenue.

Ciena is also keeping spending up on research and development these days to capture opportunities it won’t publicly describe in detail, prompting one analyst on today’s call to ask, “What’s on the other side of this operating spending rainbow?” Ciena spent nearly $30 million on R&D in the recent quarter, 18% of revenue but up only slightly from the year-earlier dollar amount. “Each of the tier-one [carriers] want it ‘my way,’ so to speak, so Steve [Alexander] has to do more R&D,” Chinnici said.

“We want to make sure we’re fueling the tank for future years,” Chief Executive Officer Gary Smith added, pointing to possible rewards in 2008 and 2009.

Whereas Ciena has noted strong widespread demand for increased network capacity in recent years, it now sees carriers actively transitioning to next-generation Ethernet-based architectures. And Ethernet is a large part of the opportunity in which Ciena is investing, Alexander said. For example, Provider Backbone Transport technology is “absolutely” on Ciena’s product roadmap, Tom Mock, Ciena’s senior vice president of strategic planning, told Telephony in a recent interview.

When asked today about the news that one of Ciena’s competitors in the optical switch space, Infinera, is poised to go public, Smith said, “This is the world we’ve lived in for a long time. We’re used to competing in it.”