Ciena: Mid-sized telcos milking legacy networks

Ciena reported seeing a divergence in carrier spending patterns in its most recent quarter, as its largest customers cautiously continued network upgrades at a slower pace while smaller carriers showed less willingness to make similar upgrades.

“We’re seeing mixed signals,” said Gary Smith, Ciena’s chief executive officer. “Amongst the larger tier-one carriers, who are in good financial health, they’re very focused on their strategic investments… Among tier twos and tier threes, there is a more perhaps negative scenario; some of them are focusing on using legacy infrastructure more than shifting to next-gen architectures.”

At an analyst event in early October, Ciena reported that the spending slowdown previously seen among the largest carriers was starting to spread to tier-two telcos.

“Carriers are clearly struggling with this fast-unfolding economic implosion and how to manage that,” Smith said today. “But in all our conversations with key executives at our large customers, they’re all continuing to see strong traffic growth…This environment could speed up the movements toward [next-generation] architectures. But that’s balanced with a number of smaller players that don’t have that ability probably staying in the legacy world longer.”

Smith admitted that the current environment was challenging but said it would likely persist for multiple quarters, not multiple years. “Clearly there’s potential for the market to get worse,” he said. “We’re not particularly seeing that right now; it’s bad enough, thank you very much.”

Ciena reported a 17% year-over-year revenue decline in its most recent quarter and predicted next quarter’s revenue could be down 18% to 25% year over year. The vendor also reported a steep sequential slide in revenue contributed by the former Worldwide Packets, which Ciena acquired this year. Worldwide Packets contributed $4 million in revenue in Ciena’s fiscal fourth quarter, down significantly from $18 million in the third quarter but up from $3 million in the second quarter. Ciena attributed the drop in WWP sales to the same macroeconomic trends affecting its overall business.

At the same time, while Ciena has hailed WWP’s carrier Ethernet technology as an important part of its so-called “converged Ethernet” strategy, the vendor today announced it had renamed its “converged Ethernet” product group, calling it the “optical service delivery” group.

Ciena also cut 60 employees in the quarter, or less than 3% of its workforce, but it also made several new hires, leaving it with only 7 fewer workers than it had at the start of the quarter.

“The large tier ones are very committed to and focused on strategic investments, things like wireless backhaul, global meshes and business services -- I’m really not seeing a sense that they’re scared to spend on those things at all,” Smith said.