Ciena reports tier-one spending slowdown

Ciena lowered its expectations for its fiscal year today, citing a broad slowdown in spending among tier-one carriers, particularly in North America, that the company believes could last a few quarters.

Ciena characterized the spending slowdown as “pervasive” across all product groups and consistent across tier-one carriers that appear to be growing more cautious about spending as a result of uncertainty about the economy in general. The slowdown appeared in the last several weeks of Ciena’s fiscal third quarter (which ended July 31) and continued in the fourth quarter, the company said.

As a result, the optical equipment vendor expects its total revenue to drop 25% sequentially in the fourth quarter to between $190 million and $210 million. Third-quarter revenue was up 5% sequentially and up 24% from a year earlier to $253 million.

“We’re not losing business nor are projects getting cancelled,” said Gary Smith, Ciena’s chief executive officer. “Orders are getting pushed out… I don’t think any of [the carriers] are changing their plans. I think they’re just being very cautious, given the macroeconomic environment, that they are on or below their anticipated budgets.”

Fundamental demand drivers remain in place, Smith said, including the need to transition to more efficient network architectures and the need to add capacity.

“I don’t think carriers have a tremendous ability to delay expenditures because they don’t have a lot of excess capacity,” Smith said. “Carriers can always run their networks a little hotter, which is probably what they’re trying to do right now.”

“It’s not that [tier-one carriers] don’t have the money,” added James Moyland, Ciena’s chief financial officer. “They’re in great financial shape. They’re generating cash. They’ve got a stronger balance sheet than they’ve had in a long time. They’re just watching the economic environment.”

Three carriers (two of them North American) contributed nearly half of Ciena’s revenue in the third quarter.

“Deterioration at Sprint, caution at AT&T and a lack of urgency at Verizon are to blame,” RBC Capital Markets analyst Mark Sue wrote in a research note following this morning’s earnings call. “Approximately two more quarters of weakness is expected.”