CIENA Corporation

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CIENA Corporation

1201 Winterson Road
Linthicum, Maryland 21090-2205
U.S.A.
Telephone: (410) 865-8500
Toll Free: (800) 921-1144
Fax: (410) 694-5750
Website: http://www.ciena.com

Public Company
Incorporated: 1992
Employees: 2,118
Sales: $361.2 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: CIEN
NAI C: 334210 Telephone Apparatus Manufacturing; 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing

CIENA Corporation is a leading maker of advanced optical networking components for telecommunications. Its multiplexing systems allow carriers to transmit multiple signals along the same circuit at the same time; its network management software and switches allow for bandwidth to be allocated where it is needed. Some 40 percent of CIENA’s business comes from AT&T and Sprint. Other major clients include Verizon, Japan Telecom, China Telecom, Telmex, and Norfolk Southern.

Optic Origins

In the early 1990s, General Instrument Corporation (GI), the Chicago-based maker of cable television equipment, developed wave-division multiplexing (WDM) technology as a means to increase bandwidth for cable TV transmissions. WDM used laser pulses lasting as little as one-billionth of a second to transmit data over fiber optic cable. In a process first developed by Bell Labs, a prism separated the light into different frequencies, which could each be simultaneously used to transmit data. An optical amplifier, pioneered in the 1980s by British researcher David Payne, was then used to make the signal a thousand times stronger—a much more elegant process than using regenerators, which converted the signal to electricity before boosting it.

General Instrument, burdened with a heavy debt load, abandoned the technology in 1992. David Huber, the 41-year-old manager of GF’s optical technology research lab, convinced the company to license him the technology if he could get a business funded within 18 months. Huber formally registered CIENA Corporation in November 1992.

According to Forbes, Huber spent the first year unsuccessfully pitching WDM as a technology for delivering movies-on-demand through cable TV systems. Among other complications, this would have required finding other companies to run the servers and license the content. Also, the agreement with GI required Huber to sell to cable companies only through GI itself.

A fellow investor introduced Huber to Jon Bayless, a general partner at Dallas-based Sevin Rosen Funds who had a Ph.D. in physics. In October 1993 he saw a demonstration of the technology in a GI lab in Philadelphia. Bayless immediately saw the WDM technology had potential for the telecommunications market. Six months later, his firm and others invested an initial $3.3 million in CIENA; start-up capital would reach $40 million by January 1996. Bayless hired former Optilink CFO Pat Nettles, another Ph.D. physicist, as the company’s CEO in February 1994. Several other investment groups also backed CIENA. Thus was Maryland-based CIENA Corporation founded.

While most start-ups subcontracted all their manufacturing, CIENA had to produce its own optical filtering devices due to the novelty of the technology. The company had four employees when it was launched in 1992 and grew to 49 employees by October 1995.

CIENA introduced its first product, the MultiWave 1600 Transmission System, in May 1996. This system used dense wave division multiplexing technology (WDM) to send 16 discrete optical channels over a single fiber pair. Earlier time division multiplexing (TDM) only allowed two channels per fiber pair. The MultiWave system also required fewer amplifiers between sites and a less expensive hardware upgrade. The WaveWatcher integrated network management system was included with MultiWave.

The MultiWave system was priced between $500,000 and $1.5 million, but allowed carriers to increase bandwidth from 2.5 gigabits per second (Gbps) to 40 Gbps without the four to five times more costly expense of installing new fiber optic lines. With Internet traffic growing at an explosive rate, carriers needed more bandwidth.

CIENA was not alone in the WDM market—Pirelli Cable Corp. was introducing a competing system, albeit one with only four transmission channels to the MultiWave’s 16. Lightpath Technologies Inc. of Albuquerque and Massachusetts-based Optical Corp. of America were two small start-ups offering WDM products. A number of larger companies, such as Alcatel Telecom, NEC Corporation, Northern Telecom, and Lucent Technologies, offered TDM or combination WDM/TDM systems. Still, CIENA had a clear head start.

The market introduction of CIENA’s first product allowed the company to finally post a profit ($14.7 million) in fiscal 1996. Nearly all of its $54.8 million in revenues for the year came from Sprint; the next year, CIENA added WorldCom Inc. and Teleway Japan Corp. as clients. CIENA formed a partnership with Nissho Electronics Corp. to market the technology in Japan.

Local exchange carriers, not long distance companies, were expected to make the most use of WDM technology as their fiber optic assets were more limited and they had recently been mandated by the Telecommunications Act of 1996 to provide wholesale services to new competitors.

Public in 1997

The company launched an initial public offering in February 1997, issuing five million shares of stock at $23 each. The opening market capitalization of $2.1 billion surpassed that of Apple Computer Inc. in 1981 ($2 billion in 1997 dollars) and Netscape Communications Corporation in 1995 ($1.1 billion), noted Upside. Share price rose 60 percent by the end of the first trading day. This first-day valuation of $3.4 billion was the largest IPO of any startup company ever, said Forbes. Though another 55 million shares were issued in August 1997, the stock price continued to trade for nearly $50. Sevin Rosen had paid a price-adjusted average of 44 cents each for his shares.

Company headquarters moved from Savage, Maryland, to Linthicum in April 1997. Company founder David Huber, who had not been active in management since 1995, resigned from the firm in May 1997. His stock was worth $300 million.

In June 1997, Cable and Wireless Communications became CIENA’s first European customer. Revenues would reach $350 million during the year. By 1998, CIENA had begun marketing to Regional Bell Operating Companies (RBOCs). Bell Atlantic was the first to sign up, agreeing to buy $15 million worth of equipment over several years.

AT&T Corp. selected CIENA’s MultiWave system for trials in August 1997; it was also testing a WDM system from Lucent Technologies, which was a spinoff of AT&T. This contract gave CIENA at least a foot in the door at three of the four major U.S. interexchange carriers, and helped bolster CIENA’s already impressive reputation. However, delays would plague the implementation of the program at AT&T, largely due to compatibility issues with the proprietary Lucent equipment.

CIENA’s relationship with Lucent, its largest rival, was often contentious. CIENA was infuriated with Lucent’s alleged habit of preannouncing products that would then fail to materialize, giving customers the impression Lucent had Leapfrogged CIENA’s technology and thereby freezing the market, or making customers postpone sales in anticipation of having better gear available later.

CIENA’s market valuation at the end of fiscal 1997 was $4.9 billion, noted Forbes —“more than the combined value of the three companies General Instrument had recently split into.” Sales were growing about 50 percent a year.

CIENA acquired ATI Telecom International of Norcross, Georgia, in a stock deal worth $52.5 million in January 1998. This raised the number of employees at CIENA from 840 to 1,000.

In June 1998, Tellabs Inc. was planning to acquire CIENA for $7.1 billion in a one-for-one stock swap. CIENA had a 40 percent share of the wave division multiplexer market. By this time, the AT&T deal was already going badly. One of CIENA’s power supply circuit boards had reportedly started to smoke during a test.

In August, AT&T terminated its trials of CIENA’s equipment on the same day the merger was to be approved by Tellab’s shareholders, sending the shares of both CIENA and Tellabs tumbling. CIENA then agreed to a new price of $4 billion. However, this concession was not enough to rescue the merger.

Company Perspectives:

CIENA is singularly focused on the success of service providers —the ultimate measure of its own success —understanding that to win in today’s market, service providers must accelerate profitable revenue growth while building lasting competitive advantages. CIENA is committed to engineering world-class intelligent optical networking solutions with the scalability, agility, futureproofing and efficiency required for sustained success.

But that’s not enough. CIENA’s commitment goes beyond providing industry-leading intelligent optical network solutions. Partnering with customers to ensure reliable and timely implementation of the correct network solutions —from network design and deployment to ongoing service and support —is essential.

At the same time, CIENA was announcing an exciting new deal with Sprint to tie Cisco Systems’ 12000 Series gigabit switch routers directly into CIENA’s DWDM system on Sprint’s Internet backbone between Fort Worth and Kansas City. This eliminated the need for an entire layer of equipment (Sonet multiplexers).

Acquisitions Illuminating Way for Growth in 1999

CIENA had launched its LightWorks initiative to simplify public networks and to lower the cost of bandwidth two years earlier. In line with this model, in March 1999 the company announced plans to acquire Lightera Networks and Omnia Communications for a total of $980 million. Lightera made optical switches while Omnia sold local access equipment.

By the end of fiscal 1999, CIENA’s customer base had increased to 27 companies; Sprint and WorldCom together accounted for less than half of total sales. Revenues fell about 5 percent for the year, to $482.1 million, as these two customers reduced their orders. Price competition resulted in a net loss for the year.

CIENA’s newest product in 2000, called the MultiWave Metro optical transport solution, allowed metropolitan area networks to deliver particular frequencies to individual customer premises. The system allowed for the use of various protocols on a single fiber, meaning it was compatible with many existing systems.

The failed AT&T deal and Tellabs merger were serious, albeit temporary, setbacks for CIENA. By June 2000, CIENA’s stock was trading at an incredible $120 per share, giving it a market capitalization approaching $20 billion. Sales of the company’s new line of products prompted the investor optimism. However, by early 2001, some analysts were wondering whether the U.S. fiber optic network had been overbuilt, observed the Washington Post.

CIENA received a major contract, worth up to $50 million in two years, from a surprising source in May 2001. AT&T, which had dropped out of a major trial of CIENA’s long-haul equipment in 1998, announced plans to introduce MultiWave Metro DWDM gear in metropolitan areas. By the end of the year, CIENA’s list of customers would have more than 50 names on it.

In spite of a declining economy, CIENA kept building upon its success, largely due to the strength of its new, flexible MultiWave CoreDirector and MultiWave CoreStream systems picked up with its acquisition of Lightera and Omnia two years earlier. In May 2001, CIENA won a two-year, $150 million contract to supply TyCom Global Network with these systems on the trans-Atlantic and Northern European terrestrial parts of its network. While most optical networking vendors were lowering expectations, CIENA was projecting 100 percent annual revenue growth as service providers invested in next-generation equipment. However, by August 2001, CIENA too was lowering its forecasts. Revenues increased 87 percent to $1.6 billion for the fiscal year ending October 31, 2001. Yet the company reported a net loss of $1.8 billion. A similarly staggering loss, $1.6 billion, was recorded for 2002. That same year the company acquired smaller rival ONI Systems, based in San Jose, California, for approximately $900 million in a stock swap. The successive losses were attributable to restructuring costs associated with workforce reductions, early retirement of debt related to the ONI purchase, charges for goodwill impairment, and the write-down of certain property and equipment. Although CEO Gary B. Smith (Nettles was now serving as chairman) cited a radically changed telecom equipment market as a challenge for the company, he also stated that “CIENA has an opportunity to achieve growth in 2003 despite decreased carrier spending.”

Principal Subsidiaries

CIENA Communications, Inc.; CIENA Properties, Inc.; MultiWave Investments, Inc.

Principal Divisions

Intelligent Optical Core Switching; Multi-Service Access and Switching; Optical Transport; Network Management.

Principal Competitors

Alcatel Alsthom Group; Cisco Systems, Inc.; Lucent Technologies Inc.; NEC Corporation; Northern Telecom Inc.; Siemens AG.

Key Dates:

1992:: CIENA Corporation is created.
1993:: Investor Jon Bay less sees telecom potential of wave-division multiplexing (WDM) technology.
1994:: Pat Nettles is hired as CEO.
1996:: Start-up capital reaches $40 million.
1997:: CIENA goes public with an opening market capitalization of $2.1 billion, but ends the day up 60 percent, to $3.4 billion.
1998:: A canceled AT&T order scuttles a $7 billion merger offer from Tellabs.
1999:: Newly acquired technologies help drive vigorous growth.
2001:: CIENA wins a large AT&T order, yet trims workforce due to slowing economy.
2002:: CIENA acquires ONI Systems for some $900 million in stock and debt assumption; reports a major loss for the second year in a row.