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Bandwidth-Hungry
Internet Renews Demand For Fiber-Optic Cable
A lot of the credit goes to YouTube.
The wildly popular Internet video-sharing site and other bandwidth-thirty
applications are driving massive investments in Internet infrastructure.
That makes equipment makers such as Ciena (NasdaqGS:CIEN - News) very happy.
The Linthicum, Md.-based company is helping telecom giants such as Verizon (NYSE:VZ
- News), AT&T (NYSE:T - News) and BT Group (NYSE:BT - News) expand capacity,
converting old voice networks into wide data pipelines.
The demand has put Ciena back in the black in 2006 after four money-losing
years. Halfway through this year, it's on track to deliver 270% earnings growth.
"The underlying demand drivers for optical networking equipment have never
appeared to be more robust," Piper Jaffray analyst Troy Jensen wrote in a client
note.
Ciena makes equipment used in citywide networks and long-haul data lines. It
also makes switches that get data to its destination and access components that
help customers deliver telephone and high-def TV over the Internet.
Its customers are telecom giants, cable companies, large enterprises and
governments.
Collectively, those markets were worth $8.2 billion last year, Ciena said. It
expects them to grow by about 18% per year through 2009.
Fiber networks transmit data rapidly over strands of light-transmitting glass or
plastic. It was the hot thing seven years ago.
Telecom companies and service providers laid vast networks of fiber that were to
be the backbone of the New Economy. Then came the dot-com bust.
Now, much of that dark fiber is being lit, thanks to video and a slew of other
information-dense applications. Service providers are updating the switches in
the system. And they're stringing fiber straight into homes to deliver even more
services.
"If you don't get the core network updated, there's no way you can accommodate
all the capacity that's required," said Stephane Teral, principal analyst with
the research firm Infonetics.
For instance, Internet video uses 1,000 times as much bandwidth as a single
e-mail, he said.
And then there's YouTube. The Google-owned video-sharing site now uses the same
amount of bandwidth as the entire Internet consumed in 2000, computer pioneer
Michael Dell said in January.
High-def TV, streaming videos on mobile phones, and other services will require
still more broadband plumbing, analysts say.
Teral said the telecom industry's latest infrastructure spending spree began in
2004. But unlike previous binges, this one is more controlled and stable.
The company expects worldwide investments to hit $240 billion in 2008, growing
at a single-digit rate through 2009 or 2010.
But carriers must also must maintain their existing networks.
Tom Mock, Ciena's senior vice president of strategic planning, likened that duel
challenge to changing out a car engine, with the vehicle running. And the driver
shouldn't notice, he said.
That's where Ciena's systems come in.
During the Internet meltdown a few years ago, Ciena placed its bet that fiber-optic
networks and ethernet systems would converge to become the dominant Internet
architecture. Ciena developed systems to help carriers lower costs by linking
those two technologies together.
"We think we've got a good solution that takes into account not only where the
service providers need to be, but also where they're coming from," Mock said.
Goldman Sachs analyst Brantley Thompson said Ciena has the right product mix. He
sees solid demand from wired, wireless and cable service providers.
"The contract pipeline continues to improve with new opportunities at Tier 1
carriers in the U.S. and Europe," he wrote.
But it has been a bumpy road.
Ciena grew with the technology boom in the 1990s. It went public in 1997. By
October 2000, its shares traded around 150.
With the collapse that followed, the company went from $4.20 earnings per share
in 2001 to a $7.98 loss in fiscal 2002. Those losses gradually shrank as the
market recovered. But by 2005, Ciena's shares traded under 2.
Over that time, though, the company was reinventing itself.
Once a solely fiber pure-play, it went on a buying spree, picking up six
companies since 2001. That expanded its product and customer base, turning it
into a broader-based network services firm.
The losses eased.
By 2006, Ciena posted a 30-cents-per-share profit.
The company initiated a 1-for-7 reverse stock split in September. Today it
trades around 36.
Analysts surveyed by Thomson Financial expect $1.11 earnings per share this
year, which ends in January, and $1.54 next year.
The company posted 26 cents per share earnings in its fiscal second quarter, up
from 7 cents the year before. Revenue in the quarter was up 48% from a year
earlier, to $193.5 million.
With the company back on track, Ciena's chief financial officer plans to step
down at the end of the year. Joseph Chinnici has been CFO since 1995. The
company has not yet named a replacement.
There are still risks.
Ciena typically relies on several customers for almost half of its revenues --
four customers each contributed more than 10% last quarter. But because of
various project cycles, that revenue is lumpy. And it faces fierce competition
from giants such as Alcatel-Lucent (NYSE:ALU - News), Cisco Systems (NasdaqGS:CSCO
- News) and Nortel (NYSE:NT - News).
Morgan Keegan analyst Simon Leopold wrote in a research note that some of those
giants have head starts in some technology areas because of past Ciena cuts in
research and development.
But he thinks the company has filled in some of the gaps through partnering with
other firms.
And Piper Jaffray's Jensen isn't expecting broadband demand to ease anytime
soon.
"The optical transport market has finally shown signs of life, and we believe
the fundamentals are in place for several years of solid growth," he wrote in a
research note.
Investor's Business Daily
Friday June 29, 7:00 pm ET
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