February 19, 2004 8:03 AM PST

Ciena scoops up start-ups

As optical switch maker Ciena struggles to return to profitability, the company has gone on a $636 million shopping spree for two start-ups.

On Thursday, the company announced plans to buy Ethernet transport and switch company Internet Photonics in a stock swap valued at around $150 million. Ciena also announced it was buying a Canadian maker of high-speed Internet access gear, Catena Networks, in a deal valued at about $486 million. Both deals, which Ciena hopes will help it enter the broadband services market, are expected to close in Ciena's fiscal third quarter, which ends in July.

Ciena, which started out as an optical switch and transport vendor, has been hit hard by the telecom downturn over the past couple of years. The company has been trying to return to profitability for several quarters. As the optical transport market continues to stall, the company has been looking to other markets for growth.

Linthicum, Md.-based Ciena also reported first-quarter results on Thursday. The company posted a net loss of $76.7 million, or 16 cents a share, down from a loss of $107.1 million, or 25 cents, in the same period a year ago. Revenue dropped to $66.4 million from $70.5 million last year, largely the result of a delay in one major order.

Excluding one time charges, the company's loss was 8 cents per share, meeting analysts' expectations, according to First Call.

"We realize that a return to profitability can't come from cost cuts alone," Ciena CEO Gary Smith said during the company's conference call to discuss earnings. "We need to grow revenues, too."

Smith said the only way to increase revenue is by expanding the company's market. The new acquisitions will help do this, he said. The Internet Photonics acquisition will provide Ciena with a gigabit Ethernet platform targeted at the cable market. In the cable market, optical Ethernet is the underlying infrastructure that will allow cable operators to offer services, such as video-on-demand, Voice over Internet Protocol (VoIP) and high-definition television. It also improves the access speeds of existing services such as cable modem Internet access.

New Jersey-based Internet Photonics already counts six of the top 10 cable operators in the United States as customers, including Cablevision and Adelphia. Smith said the start-up is generating about $5 million in sales per quarter. Ciena expects big things from the optical Ethernet market in the future. Infonetics Research predicts the market will grow from $2.9 billion in 2003 to $7.5 billion by 2007.

Ciena's other acquisition, Catena, makes high-speed Internet access gear known as a broadband loop carrier. This gear combines the functions of three products: a digital subscriber line (DSL) access multiplexer, which aggregates DSL traffic; a digital loop carrier, which connects the customer to the telephone network; and a media gateway, which provides services like VoIP. The combined product allows carriers to deploy regular telephone service and DSL services to their customer.

Ciena expects Catena to begin contributing to the company's bottom line as soon as the deal closes. In the fourth quarter, the start-up generated roughly $25 million in sales, according to Smith. Catena has already deployed more than 5,500 integrated broadband access solutions with at least three Baby Bells: BellSouth, Verizon and SBC Communications. It has also scored business from rural telephone providers and competitive local exchange carriers, also known as CLECs.

Including the two acquisitions announced Thursday, Ciena has made 11 acquisitions since 1997. Just last year the company acquired WaveSmith Networks, a maker of multiservice edge switches used to help carriers migrate their ATM and frame relay networks to multiprotocol label switching. It also bought Akara, a maker of storage area networking gear.

The company has had mixed results with its string of acquisitions. While the 1999 acquisition of Lightera provided the company with its popular optical switching platform, products from the 2000 acquisition of Cyras Systems, which was valued at $1.1 billion, have not lived up to expectations.

 

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