WITH LAYOFFS, WRITE-DOWNS, CIENA ON TRACK TO SURVIVE

There's no doubt that Ciena has weathered the economic downturn better than most. The company is still profitable, and — more impressive — its profits continue to grow.

But Ciena last week exhibited the first significant signs of being hit by the downturn, announcing about $1.72 billion in restructuring and write-down charges and a 10% work force reduction.

Most of the 380 positions being eliminated come from the company's manufacturing unit, according to Gary Smith, president and CEO of Ciena, who added that cuts come from improvements in manufacturing efficiencies and the greater availability of outsourcing options.

“We no longer require as much in-house manufacturing capacity to keep up with our customers' demand,” he said.

Smith declined to say which of these factors contributed most to the decision, but analysts believe the drop in customer demand was likely dominant. Ciena's decision to slash its payroll indicates that the company anticipates a tough environment next year.

Still, the move is seen as proactive, not as a response to dramatic events that are already causing serious damage to the company. “The fact that laid-off employees are being kept on payroll [through Jan. 10] and being offered assistance is a good sign that it's not being hastily done or done out of desperation,” said David Toung, vice president of the research department for McDonald Investments. “It's part of their long-range thinking.”

Even if Ciena's management is working to stay ahead of the game, the company likely will have to do more to ensure that it does not go down the path trod by so many other failed optical vendors. To this point, much of Ciena's success has been based on its long-haul grooming capabilities and focus on a disciplined and attainable business plan, analysts said.

But two of Ciena's 10% customers from fiscal 2000 — Qwest Communications and Sprint — have announced significant capital expenditure cuts for next year.

One of the most important things Ciena can do is to expand its customer base among traditional carriers. It has significant business with the established interexchange carriers but needs to pursue the incumbent carriers.

“Ciena will be looking more toward RBOCs and established ILEC carriers as they do metro builds,” said Nancee Ruzicka, program manager for The Yankee Group. “There are some huge metro [requests for proposals] for early next year. They're certainly going to be zeroing in on that.”

Such thinking fits Toung's assessment of the company's future product mix. In March, Ciena closed its purchase of Cyras Systems, an acquisition that gave it a metropolitan transport and switching platform that recognized revenue for the first time in the fourth fiscal quarter. According to Toung, the company needs to gain traction with that product in order to keep analysts happy.

A Ciena spokesman agreed it's in the company's long-term interest to pursue accounts with the Bell companies.

“We certainly understand that the RBOCs continue to have a need for products like the ones we offer. We are focusing on trying to help them.”