Ciena's secret weapon: diversification
While bigger network rivals like Alcatel Lucent struggle with legacy and integration issues, Ciena's multiple offerings allow for nimble growth.
(Fortune) -- Ciena continues to dance ahead of a network infrastructure market dominated by wheezing old-line giants like Alcatel Lucent, Nokia-Siemens, and Nortel. The Linthicum, Md. networking equipment supplier blew past expectations in the most recent quarter and raised its sales target to 27% for the year. That outlook was sunnier than analysts consensus estimates of 21%, and helped propel Ciena (CIEN) stock up 11% Friday.
It's been quite a decade for Ciena. With a popular capacity-expanding optical technology to peddle during the late-90s Internet boom, Ciena was one of the favorite stocks of the day. During the subsequent collapse of the industry, the company managed to survive by moving into new technologies. Early bets on optical switching, new-generation hybrid gear and more recently Ethernet technologies have help put Ciena squarely in the order flow as phone and cable companies look to build bigger, faster systems.
Of course, the competition isn't exactly absent in this market. Each player is desperate to get in on the big spending trends at AT&T (T, Fortune 500), Verizon (VZ, Fortune 500), and Comcast as they commit tens of billions to expand their communication services. Putting together winning designs, however, has been a critical challenge. Alcatel Lucent (ALU) remains the world's top network equipment, supplier with products and support teams inside every major carrier. But the gearmaking giant, with all its installed history, can't seem to find its footing in a shifting market. Under CEO Pat Russo, Alcatel Lucent has posted a year's worth of quarterly shortfalls and three rounds of layoffs as the tech shop continues to lose ground.
Ciena CEO Gary Smith chartered the somewhat controversial tech diversification path after the Internet spending bust, and those decisions have seemingly helped put the company on a smooth-sailing growth course. This success is a stark contrast to the flailing at rivals Nortel (NT) and Alcatel Lucent. "We are a focused specialist, they have a more complex set of issues," Smith said on an earnings conference call with analysts Friday, referring to the other players in the sector. "We can move faster, which gives us a competitive advantage, especially when we are at the early stages of a big shift," Smith added.
The stock market has rewarded Ciena's performance and its larger rivals like Alcatel Lucent. Though Ciena has taken a beating during the tech selloff over the past four months, it has managed to earn a $2.5 billion market cap, nearing the $3 billion market value investors give shrinking Canadian competitor Nortel. Alcatel Lucent, meanwhile, touched a new five-year low Friday and carries a $12.5 billion market value.
Critics point out that Ciena has had to buy other smaller companies, rather than innovate its own networking solutions to stay in the game. The rollup strategy isn't a new one to business. Buying revenue certainly raises red flags, but it's the ability to integrate new tech advances that tends to be the test of a sound acquisition policy. Spending cycles change and incumbents have been know to rally, so it's far from assured that Ciena's winning streak will last forever.
But Telecom Pragmatics analyst Sam Greenholtz says there is some proof that Ciena's strategy is working. "They are taking market share from the big guys," says Greenholtz. And if they can keep that up, they'll be one of the big guys.