Ciena
Corporation
(CIEN)
Research Report
December
18, 2000 .
Closing
price on December 15, 2000 was $105 per share.
The following is a culmination of a research project that I
have been working on. Please do not rely on this data as being free of
material misstatements and errors, as it is a "Work In Progress".
Please excuse the sometimes technical nature. I have been researching the fiber
optics industry for about 8 months now. The companies that we have been watching
closely are Ciena (CIEN), Lucent (LU) and Cisco (CSCO). This is an in-depth
discussion on Ciena Corporation (CIEN)(107).
Notes on Ciena Corporation.
A. the following is from Ciena's F2000 Form 10-K
>>PROVISION
FOR DOUBTFUL ACCOUNTS. CIENA performs ongoing credit evaluations
of its customers and generally does not require collateral from its customers.
CIENA maintains an allowance for potential losses when identified. CIENA's
allowance for doubtful accounts as of October 31, 2000 was $29.6 million.
Approximately $27.8 million relates to provisions made for doubtful accounts
associated with iaxis Limited, one of CIENA's European customers.<<
There is very little provision for Allowance of Accounts
Receivable, other than the Iaxis loss. Ciena has a Significant Customer that
has contributed to > 10 % of Ciena's F2000 revenues called GTS. GTS is in
default with several of its Debt Obligations (not Ciena related). GTS trades at
around $0.50 per share. It appears that Ciena has made no allowance for GTS.
Ciena has discussed that GTS remains current on all Accounts Receivables with
Ciena (see further discussion below).
SFAS 5 - contingencies
http://www.nysscpa.org/prof_library/FASB/Fasb5.htm
from
10/31/00 10-K >>
As of October 31, 2000, the trade accounts receivable included three
customers who each accounted for 28%, 16%, and 13% of the trade accounts
receivable, respectively. As of October 31, 1999, the trade accounts receivable
included three customers who each accounted for 30%, 14%, and 12% of the trade
accounts receivable, respectively.<<
57 % of total accounts receivable was attributable to 3 customers (consistent
with 1999). Total A/R = 248,950,000 .
Some observations of above.....
1. Total A/R was 29 % of annual revenues in F2000.
2. Total A/R was 30 % of annual revenues in F1999.
3. Total A/R was 15 % of annual revenues in F1998.
**********************************************
For the first time Ciena has a customer that is having documented financial
problems . This customer is GTS. GTS is 1 of 3 customers who made up 60.9% of
Ciena's F2000 revenues. Ciena does not disclose (totally acceptable) a
breakdown of who the 3 customers that make up 57 % of the accounts receivable
balance are.
For all we know, GTS could be totally current in their accounts receivable.
Ciena in the conference call indicated that GTS was not in arrears. Ciena did
not clarify if that statement was as of statement date (10/31/00) or as of December
7, 2000 (conference call).
Just for discussion purposes I have extrapolated various hypothetical scenarios
based on possibilities that GTS is one of the 3 customers disclosed in the
accounts receivable.
The following is a table of what the accounts receivable breakdown would be....
28% customer.....$69,706,000 or .23/share
16% customer.....$39,832,000 or .13/share
13% customer.....$32,363,500 or .11/share
There does not appear to be a material allowance for any of these amounts
(acceptable), nor does there appear to be any allowance for a potential GTS
uncollectible receivable (again, Ciena has claimed that GTS is in good standing
with Ciena).
B. Calculation of Return on Equity
(October 31, 2000)
ROE = Net Income / shareholders equity (beg +end avg)
ROE = 81387/(809835 + 530473)/2
ROE = 81387 / 670154
ROE = 12 %
C. Various notes
of October 31, 2000 form 10-K
1. Cash and equivs at F1999 was 262,396 at F2001 was 238,318 (decrease
of 24,078). (also a decrease from last quarter by 5782).
2. A/R at F1999 was 144,348 at F2000 was 248,950 (increase of 104,602). (also
an increase from last quarter by 35,850).
3. Inventory at F1999 was 79,608 at F2000 was 141,279 (increase of 61,671).
(also an increase from last quarter by 33,279).
4. Sales for F1999 was 482,085 for F2000 was 858,750(increase of 376,665).
5. Sales increased YOY 78 %.
6. Current Ratio was 5.05 F 1999, vs 4.69 F2000
7. Quick Ratio was 4.30 F 1999 vs 3.88 F2000
8. A/R inreased YOY 72 % (this makes sense since cash stayed flat, this is
generally a decent sign that fundamental balance sheet is intact. Again 10 K is
required).
9. Inventory increased YOY 77 % (see above)
10 . Shares outstanding increased 10,978,000 (calculates to 1 billion dollar
increase at $100 per share or increase of shares 4 %).
11.
Research and Development decreased from 22 % of sales in F1999 to 15 % of sales
in F2000. (see Discussion from the following Motley Fool article.
"The
Fool take Ciena's R&D (from prior to September 1, 2000)
It's amazing how much we can learn from reading financial statements, but
numbers don't tell the whole story. Always explore the business reasons behind
sudden changes on financial statements.
Consider fiber-optic product maker Ciena, which recently reported strong fiscal
third-quarter sales and earnings growth. Investors taking a close look might
scratch their heads about the firm's research and development (R&D)
spending. Ciena reported R&D expenses of $32.7 million, representing about
14 percent of sales. This is significantly lower than year-ago levels. In
1999's second quarter, Ciena spent $28.4 million on R&D, representing 22
percent of sales.
If R&D had kept pace at 22 percent of sales, Ciena would have reported much
lower net income. Investors might wonder whether something fishy is going on,
whether the company is trying to boost earnings at the expense of research and
development. Instead, though, it turns out that last year's R&D level was
high relative to sales because the company had just made two acquisitions.
Neither company had products on the market at the time, so R&D expenses
were high.
Now that one of those companies is selling gear, sales are up and R&D as a
percentage of sales is down. Ciena's R&D target is 13 percent to 15
percent, putting this quarter's spending right on target, according to a
company official.
While investors can glean a lot of information looking at financial statements,
they should never be viewed in isolation, especially on a quarter-to- quarter
basis.
http://www.postnet.com/__86256680006cac6e.nsf/33b487e198e84315862566fe00633b40/b
205a0c485060f8c862569490065fdc9?OpenDocument&Highlight=2,ciena
12. Gross Profit increased from 38 % of sales in F1999 to 15 % in F2000.
13. management indicated Q1 2001 est eps will be between .13
and .17
14. growth rate going forward per management on revenues should be 75 - 85 %
over F2000.
15. Ciena projects between .63 to .81 for F2001.
D. Some Ciena thoughts and
observations from F2000 Form 10-K.
*eps was great, yet, NOL is growing. That is something that I need to watch.
Oh, thank god for GAAP.
*even though eps is growing the return on equity is light. ROE = 12.14 % .
Fiscall 1999 ROE was as follows through history. This is from Value Line
1996 32.40 %
1997 31.10 %
1998 16.30 %
1999 01.70 %
* Value line projected F2001 shares outstanding of 290 mil, whereas we are
already at 300 mil as we speak (i guess another 5 % for F2002).
* don't poopoo the dilution. Dilution is material to valuation. In simple
terms, this is why shares outstanding and dilution is important....If you earn
$ 100,000,000 with 280,000,000 shares , that is eps of .3571, yet if you earn
the same $ 100,000,000 with 320,000,000 shares , that is eps of .3125 . This is
a difference of .0446 per share or $14,272,000 (.0446 * 320,000,000)
E. More 10-K info, if you take
into account excercising options , Ciena actually has a Net Loss for F2000.
>>pg 54 ...Pro forma Stock- Based Compensation.
Is their an error here. i found one typo, but, thats minor, no big deal.
yet the statement is showing pro forma net loss of (.09) for F2000. I cant seem
to back into this number. Was it a typo and actually Pro forma net income of
.09. It seems like the difference is $107,631,000 (81,387 + 26,244 ).
I'm exhausted, so I cant really dive into it now. Any help would be
appreciated.
<<
This is one answer I have received
http://www.prudentbear.com/boards/user/non-frames/message.asp?forumid=4&messagei
d=18650&threadid=18624
>>The per-share loss ($0.09) is consistent with a loss ($26 million)/287
million shares outstanding.
They assign a pro-forma average value of $64.99 to options granted in F2000, so
they must have granted at least $107,631,000/$64.99 = 1,656,116 options for
compensation. Actually it would be $108 million/($65 - x), where x is average
cost per option in their non-pro-forma accounting.
Their executive compensation section is blank:
ITEM 11. EXECUTIVE COMPENSATION
The information is incorporated herein by reference to the Company's definitive
2001 Proxy Statement.
In the summary table on page 53, they say they granted a net of about 10
million options, but it isn't clear what part of that is compensation expense,
what part is for purchase of companies, and what, if any, is assumption of
purchased companies' options. Hats off to anyone who can figure out what they
actually did.<<
JMO...
This is tough stuff. This is one place where investors can look to help
determine whether there is or is not a flaw in the Ciena valuation model.
Valuation is like a jig saw puzzle. Ciena has over 1000 pieces and lots of
Buffalo like, gray sky, so the pieces are more challenging to put together. I
am hoping that there are no missing pieces to this puzzle.
F. Ciena actually has a $249
million dollar Net Operating Tax Loss Carryforward (equates to .83 per share).
It amazes me that Wall Street analysts have not discussed this.
>>As of October 31, 2000, the Company has a
$249.2 million net operating loss
carry forward and an $18.1 million income tax credit which begin to expire in
fiscal 2016 and 2014, respectively. Management believes that, after considering
the anticipated future operating results of the Company, the net deferred tax
assets will be realized. However, there cannot be complete assurance that this
will occur.
The income tax provision does not reflect the tax savings resulting from
deductions associated with the Company's stock option plans. Tax benefits from
exercises of stock options of approximately $11.0 million and $154.6 million in
fiscal 1999 and fiscal 2000, respectively, were credited directly to additional
paid-in-capital.<<<
This is a main focus of mine.
G. A further discussion of
Significant Customers from F2000 Form 10-K
>>Historically, the Company has relied on a
limited number of customers for a
substantial portion of its revenue. During fiscal year 2000, Sprint, Qwest
Communications and GTS Network Ltd. each accounted for at least 10% or more of
CIENA's revenue and all three combined accounted for 60.9% of the Company's
fiscal 2000 revenue. During fiscal year 1999 Sprint, MCI WorldCom, and GTS
Network Ltd. each accounted for at least 10% or more of CIENA's revenue and all
three combined accounted for 46.2% of the Company's fiscal 1999 revenue. During
fiscal 1998 Sprint was the only 10% customer and in total accounted for 52.5 %
of the Company's fiscal 1998 revenue. The Company expects that a significant
portion of its future revenue will continue to be generated by a limited number
of customers. The loss of any one of these customers or any substantial
reduction in orders by any one of these customers could materially adversely
affect the Company's financial condition or operating results. <<
http://www.sec.gov/Archives/edgar/data/936395/000095013300004793/0000950133-00-0
04793.txt
What is not included is the F1997 numbers, which I got from the F1999 10-K.
During 1997 Sprint and WorldCom contributed 88 % of total revenues.
So, what do we have ?
1. We have Sprint as their heavy recurring customer. Very important
relationship. I asked the TLAB board about the contract with FON, and 1 person
answered saying it was not in competition with Ciena, since they think TLAB's
product is short haul, not long haul. I have know idea as to the accuracy of
the statement or the poster.
2. Customer concentrations by goal should decrease. This is not always
acheivable. We do see a history of lumpy concentration, yet, F2000 had the
greatest concentration since F1997.
F2000***********60.90%
F1999***********46.20%
F1998***********52.50%
F1997***********88.00%
What does this all tell me ? Heck, not a great deal, other than two continue to
monitor customers and the Big 3 or 4 (WCOM) closely.
H. Please visit our site www.rbco.eboard.com and see
other discussions on capital expenditures (CapEx) and optical
systems.
I. Just a blurb from a Merrill
report discussing CapEx.
>>o In our previous The Telecommunicator, we highlighted investors'
growing
concerns that the US telecom service industry had expanded capex programs well
ahead of industry revenue growth rates. We are revisiting the capex issue and
updating our projections. In summary, we see no significant change to our
assessment that the telecom services industry capex in 2001E will be roughly
flat to possibly down slightly compared with 2000E. <<<
>> o In our in-depth report, we provide a full breakout of our analysis
for the
RBOCs as they enter the consumer long distance market over the next two years.
Please contact our office for a copy of our in-depth report. We will also make
our consumer long distance model available upon request<<
>> In addition to the five trends that we have highlighted above, we
would also
like to remind investors of the potential capital outlay associated with the
upcoming spectrum auctions. We do not believe that these costs are fully baked
into current 2001E street EPS estimates, or company forecasts. <<
>> We now estimate that total telecom spending (for a representative
sample of
companies) for 2000 will be $115.1B (a 44.7% YoY growth rate), and for 2001
will be $110.8B (a 3.7% YoY decrease). Our 2002 estimate is $99.3B (a 10% YoY
decline) - although we are not entirely comfortable with this figure and
suspect a higher outcome is much more likely. <<
>> In our in-depth report, we provide a full breakout of our analysis for
the
RBOCs as they enter the consumer long distance market over the next two years.
Please contact our office for a copy of our in-depth report. We will also make
our consumer long distance model available upon request. <<
J. Why is Ciena considered a
Short candidate. (This is not a recommendation to short Ciena)
Basically because i feel growth rates and multiples are not in sync with stock
price. customer base seems to be having financial concerns. capex appears to be
truly slowing. insider activity (looking forward to new guidance).
Most importantly , i understand the explosive nature of the stock, basically
driven by hedge funds and daytraders. So i recognize that this short can cause
a photon quick contraction of my wallet.
lastly, important to say, i could quickly change my mind as new data appears. i
look forward to articles by Motley Fool and I am hoping that
www.grantsinvestor.com or www.cfraonline.com does an article.
THIS IS A ROUGH DRAFT. THIS IS SUBJECT TO ERROR. PLEASE DO NOT RELY ON THIS
DATA, AS YOU SHOULD CONDUCT YOUR OWN DUE DILIGENCE.
Respectfully Submitted,
Ronald R Redfield CPA, PFS
Redfield, Blonsky & Co. LLC
15 North Union Avenue
PO Box 1103
Cranford, NJ 07016-1103
908 276 7226
908 276 7274 fax
Disclaimer
Information herein is believed to be reliable, but its accuracy and
completeness cannot be guaranteed. Opinions, estimates, and projections
constitute our judgement and are subject to change without notice. This
publication is provided to you for information purposes only and is not
intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and
Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any
investments mentioned in a report or discussion.