Ciena Plunks Down $45M for Akara

Company may now believe enterprise and storage networking is the answer to its woes

August 22, 2003

4 Min Read
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Ciena Corp. (Nasdaq: CIEN) appears to be forging a unique industry strategy on what to do when you have heavy losses: Spend more money!

In reporting a quarter marred by heavy losses, the company also announced plans to acquire SAN-over-Sonet startup Akara Corp. for $45 million (see Ciena to Acquire Akara and Ciena Reduces Q3 Loss).

It's an interesting twist in an industry filled with companies retrenching to save money. In fact, Ciena's approach appears to be diametrically opposed to that being pursued by Sycamore Networks Inc. (Nasdaq: SCMR), which has cut things to the bone and is sitting tight on its piles of cash (see Sycamore Slouches After Earnings).

In a conference call with Wall Street analysts this morning, Ciena CEO Gary Smith said the deal is part of Ciena's ongoing effort to diversify its product line and customer base and transform itself from a maker of core optical networking gear into a "networking solutions provider."

The Akara deal is part of Ciena's push into SAN/enterprise networking, a major driver of metro networking.Akara, which has been around since late 2000, specializes in gear that extends SANs over Sonet networks, thus letting companies extend metro data backup (see Akara Hacks Headcount, and SANs See Sonet).

Akara was one of the first players in this segment, which Ciena estimates to be worth about $300 million to $400 million of the $1 billion-or-so overall SAN market (see Akara to Challenge Optera?, and Akara Completes Successful Trials). Though Ciena execs acknowledged Akara will add about $1 million to the company's quarterly burn rate, execs said it could contribute to a $3 billion potential market for Ciena in the long term.

Akara faces a growing list of competitors, though, including Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), LightSand Communications Corp., Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT) (see Nortel Pipes SANs Into Sonet).

Akara will stay in its Ottawa, Ontario, headquarters at its present headcount of around 50, Ciena says. It will become Ciena's newly hatched Enterprise Services Group, which will be headed by Akara CEO Edward Ogonek. Initially, Ciena will probably report Akara sales with metro transport revenues.

The boards of Ciena and Akara have approved the deal, as have the stockholders of Akara. Ciena stockholder approval isn't needed on this one, execs said.Naysayers, though, have plenty of ammunition. With Ciena losing so much money and so far from breaken, critics wonder if this is really the time to buy more companies before Ciena's even proven that past acquisitions -- such as those of Cyras, ONI, and WaveSmith -- have worked out to its advantage.

Meanwhile, Ciena continues to burn cash as its revenues decline. For its third fiscal quarter, ended July 31, the company reported $68.5 million in quarterly revenue, down nearly 7 percent sequentially, and a net loss of $88.9 million, or 20 cents a share. In other words, it lost more money than it brought it in. In the year-ago quarter, Ciena lost nearly $160 million, or 42 cents a share.

With its burn rate at such a high level, Ciena probably has no choice but to keep cutting costs. Headcount's at 2,024 after a layoff of "about 90 employees" this past quarter (see Ciena Tightening Its Belt).

This quarter, domestic sales accounted for 60.4 percent of revenues, down from 68.5 percent last quarter. Next quarter should see input from new customers British Telecommunications plc (BT) (NYSE: BTY; London: BTA) and Telfonos de México, execs said.

Figure 1:

Ciena says it will keep acquiring, too. Besides Akara, excecutives say it plans $15 million in additional investment in private companies this quarter. While speculation's rampant about what may be on Ciena's wish list (see Is Ciena Eyeing Luminous & Laurel?), no details were offered. One thing, though: Execs make it clear Ciena might invest where partners are needed to meet some of the RFPs (requests for proposal) that have cropped up this past quarter, for which the company sees good opportunities (see Analysts Narrow RFP Odds).

Ciena claims seven new customers during the quarter, for a total of 72, in part thanks to the WaveSmith acquisition, which brought in SBC Communications Inc. (NYSE: SBC). Two customers, unnamed, accounted for 23 percent of revenues this quarter, but that figure was down from 43 percent last quarter.

Smith said revenue next quarter "is likely to be between 5 percent up or down from our fiscal third quarter revenue, depending on the timing of significant orders."

Ciena shares were trading at $5.77, down $0.05 (0.91%), after this morning's report.

— Mary Jander, Senior Editor, Light Reading

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