Ciena CEO: top carriers now budgeting “monthly”

Ciena today reported that its carrier customers are approaching an “unsustainable” level of thriftiness in the face of ever-rising network traffic levels.

Having missed its fiscal-first-quarter revenue target, the optical equipment vendor today announced plans to cut 9% of its workforce (about 200 employees) and to shut down the research and development facility it inherited from its 2003 acquisition of Wavesmith Networks.

Reporting revenue declines of 7% sequentially and 26% from a year earlier, Ciena took the unusual step of refusing to forecast revenue for the coming quarter, citing limited visibility in a difficult economy. Though the downturn is lasting longer than Ciena executives originally anticipated, Gary Smith, its chief executive officer, reiterated today his expectation that it will be measured in quarters, not years. And he reiterated that while carriers are slowing and delaying projects, they are not cancelling them.

However, while carriers have been overutilizing their networks for months, they are underutilizing their budgets, Smith said. Capital expenditures for the vendor’s top ten carrier customers have averaged about 14% of their revenue since 2004, he said. But last year, that number dropped to 12.5%, and this year it could fall below 12%. “If that happens, it would represent a historically low capex-to-revenue ratio that we believe is not sustainable given the dynamics around expected traffic growth,” Smith said. Further, although most carriers approved this year’s annual budgets last fall, they are now making spending decisions “on a monthly basis.”

“We don’t take too much comfort, frankly, from the fact that they’ve approved their annual budgets because they’re managing it truly quarterly,” Smith said. “Say a project would be an order for $10 million. We’re getting an order for $5 million. It’s smaller across the board. We’re seeing things like that. And yet they’ve got the budget for the $10 million.”

For example, Ciena’s Ethernet services business, which includes products from its acquisition of Worldwide Packets last year, contributed $10 million in fiscal-first-quarter revenue (or 6% of total revenue), down from $12 million in the previous quarter. When asked about AT&T’s plans to deploy that gear for business services – believed to be an important determinant in the high price Ciena paid for WWP (about $300 million) – Smith said, “I think that project continues to be committed to on their part for obvious reasons, but it’s taking longer than we both anticipated to roll out.”

The R&D facility in Acton, Mass., that Ciena is closing came to the company through its acquisition of Wavesmith Networks in 2003. Wavesmith’s product became the basis of Ciena’s first data product, the DN 7000 multiservice ATM switching platform, deployed by Verizon and SBC (now AT&T), among others. But the technology developed there later found its way into other Ciena products such as its 4200 multiservice transport platform and its CoreDirector optical gear, a new version of which is coming soon, the company said.

In a research note issued after today's call, Morgan Keegan analyst Simon Leopold predicted Ciena's top line will hit bottom with a 9% sequential drop in its next fiscal quarter (which ends in April) before resuming growth in the July quarter. "We still envision Ciena as an early beneficiary of a stabilizing and then recovering industry," Leopold wrote.