CIENA Corporation
CIEN
Q2’01 Conference Call Notes
May 17, 2001

These are preliminary CIENA Notes from Q2 F2001 earnings release and conference call.

http://www.ciena.com/investors/

http://www.ciena.com/aboutus/

These notes are prior to release or review of Form 10-Q

Price: ………………………………….$59.75
5-Year Price Target: ………………N/A

Opinion: ………………………………Strong Sell
Shares Outstanding: ……………..306,329 m
Market Capitalization: ……………18,379 million
Estimated 5-year growth rate: …40 %
Symbol / Exchange: ……………….CIEN/NASDAQ

1. Proforma and GAAP Gross Margin is 45.50 %. This is similar to previous quarter.

2. DSO (days sales outstanding) of Accounts Receivable is 57 days. This is an improvement from Q1’01 of 64 days.
3. Inventory turns dropped to 3.4 times from Q1’01 of 3.7 X.

4. Debt to Equity ratio is 22.40 %. There was no debt prior to this quarter. This is known as a fundamentally healthy percentage. Just needs to be monitored closely in the future, especially since there is no short-term debt.

5. Current Ratio is 4.28 from 4.72. Very healthy number.

6.
Cash increased 1,241 million
Accounts Receivable increased 16 million
Inventory increased 68.8 million
Revenues increased 73.4 million
Research and Development increased 10.6 million
Accounts Payable and Accrued Expenses increased 71 million
Current Liabilities increased 69 million
Long Term Debt increased 859 million
Goodwill increased 2,028 million (Cyras)
Other Assets increased 128 million

7. Shares outstanding increased by 19.328 million shares. (Approximately $1,159,680,000 in market capitalization.

8. Acid Test Ratio (CA – Inventory)/ CL = 7.27 (very healthy)
9.
A. Equity Ratio at Market = Common equity at market value / Tangible assets – accrued payables

Using share price of $ 60
shares outstanding of 306,329,000

market capitalization = $ 18,379,740
Tangible assets = $ 2,931,066
Accrued payables = $252,422

Equity Ratio at Market = 6.86

10. Tangible Book Value is 5.73 per share.

11. The Motley Fool Flow ratio is 2.744. This is an improvement from Q1’01 of 3.30. This link explains the Flow Ratio. An ideal flow ratio is < 1.25. This is not a CIENA concern, since they just came off of a large funding, etc. Just another tool to watch.

http://www.fool.com/portfolios/RuleMaker/RuleMakerStep6.htm#10

Flow Ratio = (CA – Cash and CE)/ (CL – STD)

CA = 2,243,731
CE = 1,501,375
CL = 270,571
STD = 0

Flow Ratio = 2.744

Looking forward to discussion of allowance for doubtful accounts.

Quarterly percentage increase of

Sales 21 %
Accounts Receivable 6 %
Inventory 33 %

Conference Call Notes

1. Strong demand by certain customers.

2. Highest concentration of total customers.

3. Two 10 % customers. Both were North American. Both included 52 % of total Revenues. Previously were 63 %. International was down and 13.4 %.

4. Core Director > 10 % of total revenues.

5. CoreStream related revenues increased from last quarter.

6. OC-192 and OC-48 increased.

7. Discussed use of proforma net income. Discussed that Proforma net income was 75 million than GAAP net income. Failed to mention that GAAP net income was actually a Net Loss.

8. Working capital increased 1.2 billion.

9. Inventory increase came in area of finished goods. Longer trial and instillation of core director. Also some order delays and shipment reassignments. According to CIENA this is not a concern.

10. Headcount is 3860 or increase of 21 %. Includes about 270 Cyras employees. In contrast to rest of industry, CIENA continues to hire.

11. Seeing customers slowing down orders. Mentions that not immune to environment, but, better positioned than others. Sees move towards spending on next generation versus legacy products.

12. Seeing increasing evidence that open architecture is taking market share from closed architecture systems.

13. Market share in Long Haul being taken from Legacy.

14. Metro has 9 customers in quarter. CIENA believes metro has opportunities. Cyras fits into this mold as it is forming the Metro Switching Division. Cyras K2 platform is ready for minimal shipment. Has a signed contract with Level 3.

15. Core director has been shipped to 15 commercial customers. Trial base should expand. CoreDirector is early in ramp, revenue recognition criteria of Customers may make CoreDirector less than 10 % of revenues in a future quarter. Expects CoreDirector to be greater than 10 % for Fiscal 2001.

16. Pricing concessions by competitors are possibly causing uncertainties in gross margins.

17. Confident of future and positive of CIENA’s position in optical networking.

18. Seeing customers taking dramatic pricing pressures. This could decrease gross margins by 100 basis points.

19. Expects K2 to cause gross margin pressures until volume picks up. Expects K2 revenues to become reportable in Q4’01.

20. 3rd quarter will show a full quarter of full Cyras expenses. Sales and marketing expenses will be 10 %, R&D 12 % and G& A (I missed this). Suggested raising cost parameters in models. Also mentioned to watch the extra shares.

21. Sell side eps is about 0.73 for F2001. Based on guidance they expect eps for F2001 to be $0.72 to $0.75

22. F2002 guidance over F2001 should be between 45 – 65 %.

Question and Answers.

23. Sivlerstein from Robbie Stephens : CIENA says CoreDirector has 15 customers. Sileverstein asks about competition for CoreDirector. CIENA says little competition, maybe Tellium so far. Looking to max sales during this low competition period. K2 revenue wont be disclosed on level 3 deal.

24. henderson from SSB ….. Vast majority of CoreDirector sales is replacement of legacy systems, from ADM’s to Cross Connects. Transport pricing pressure is longer haul transport. Pricing of Metro other than CoreDirector is showing potential pricing challenges. CoreDirector is seeing no pricing challenges, yet. Long Haul vs. Metro is not split up. Yet Metro is NOT 10 %.

25. Dain Rauschler…..OC-192 on transport has about 10 customers. Looking in crystal ball for Long haul vs. Metro. Metro should be 10 % or a little higher moving forward.

26. UBS Warburg……10 % customers had no new ingredient. Therefore we can conclude that 10 % rs were Qwest and Sprint (my guesses not in CC). Long Haul and Core Director grew about 20 %. Metro was flat. Long Haul doing great. Long Haul is primarily new systems and not necessarily channel adds.

27. Goldman Sachs…..major long builds will not be disclosed in this CC. Much of this from North American perspective is in public domain. CoreDirector has great synergies with CoreStream. This is showing traction on transport side. With CoreDirector and K2 they can provide a full solution for integration. Integrate network management, point and click at edge of network. Network management in June for CoreDirector. Then later in year software will integrate with K2 for Network management.

28. Didn’t get analyst…..doing very well in North America. Should be more balanced in 2002. Looking for Asia growth in future. (Personally, it sounds, as though international was disappointing….those are my words). Cost analysis with carriers in all optical are proving to challenging right now, but these are early days.

29. Morgan Stanley…..not seeing lots of pricing pressure on OC-192, believes that CIENA offers a robust OC-192 system, hence pricing is stronger than competition. OC-192 components are showing deflated prices, which helps margins.

30. Bank of America…….most of Europe is SDH. CoreDirector has full SDH compatibility and integration. Large market opportunity, hasn’t hit the market, has infrastructure in place in Europe and would like to leverage off that.

31. WIT Soundview……high channel count landscape hasn’t changed much. Nortel is talking about open architecture and high channel count, yet, we aren’t seeing shipping yet. Outside of Nortel, not allot of competitors, perhaps to a lesser degree Alcatel (hinted seeing them in a “larger account” of course that is Sprint…again, my words.)… Customer acceptance for CoreDirector is 3 to 8 weeks (sometimes a little longer).

32. Lehman Brothers….Dynegy is PanEuropean substantial transport build. Finished Goods is about 122 million, very consistent with first quarter. Vendor financing landscape hasn’t changed much. Perhaps seeing less pressure of vendor financing due to environment. Vendor financing is not a selling point by CIENA.

33. Didn’t get analyst…..asked about Tellabs competition with product 6700. CIENA said Tellabs well entrenched with RBOC’s , but not seeing as a major player right now. Cross Connect and ADM replacements with K2 integration and going further to edge of Network becomes very valuable. Push outs occurred since end of quarter and through today nothing has changed.

34…Ambro…..gross margins for 4th quarter should be higher than 3rd quarter, perhaps due to higher volumes of Cyras K2. Value of CoreDirector and K2 integration is valuable worldwide. Where is high channel count competition expected to come from? They just don’t know since they are not seeing any evidence of Nortel and Alcatels high channel count claims. CIENA stated that if pricing was not economical they would turn down long haul opportunities.

35…DBAB , Raj Srikanth(my favorite)…. capability of CoreDirector and scaling will meet all needs of customers. K2 is targeted at financially healthy customers, not looking for Clecs, compared Cerent (CSCO) with different customer base.

36. WR Hambrecht…..CIENA will emphasize complete offering ….Level 3 and Sprint are taking multiple products. Majority of major customers are taking multiple products. Most of large customers want to limit vendors. CIENA is becoming a top 3 strategic providers. Less competition from point providers. No need to sustain relationship from weaker supplier. Less about pricing more about offering solutions that work. CIENA offers best of breed solutions, gains opportunity because of base to show these products.

37. Tom Weisel…..newer items of 10G components are coming down in price. They look to work for vendor relationships in riding this pricing situation of components.

38. McDonald investments…..asked about Qwest, number of cities, how is deployment working. CIENA will not comment on detail of Qwests architecture. Indicated that Qwest uses multivendors on all optical deliveries.

39. Merrill Lynch (Michael Chin)…CIENA wont comment if both 10 % customers will end up as greater than 50 % for F2001. Chin indicated that CIENA goal was to reduce reliance on customer concentration.

40. Missed analyst……3 discreet component parts of metro space, which CIENA does via CoreDirector, CI and K2. This gives the complete portfolio. ONI is gaining share in metro; yet, integration and customer base is much larger at CIENA. Focus by CIENA is only looking at tier 1. Asked if Sprint has added second source of transport. CIENA said, “ask Sprint “.

41. Seth Spaulding , Epoch Partners…. asked about long term supply agreements and if so are they being renegotiated. CIENA explains that they aren’t concerned with lockins because they have great vendor relationships. (My words, looks like CIENA jumped over question and would not give answer).

42. Dressdner……TyCom will be a revenue generator in Q3 and Q4. Visibility was asked about. CIENA claims they maintained guidance moving forward. Visibility for Q3 and Q4 is not as good as it has been, but good enough to reiterate the 95 – 105 % growth going forward.

43…missed analyst….asked about other assets on balance sheet. Warranty costs and spare inventory. (hmmm, need to keep eye on this, 10Q might tell). These spare parts are not available for sale, hence not included in inventory.

CIENA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

	Quarter Ended	Quarter Ended	Six Months Ended	Six Months Ended
	April 30,	April 30,	April 30,	April 30,
	2000	2001	2000	2001
Revenue	$ 185,679	$ 425,396	$ 337,892	$ 777,385
Cost of goods sold	104,205	231,509	191,208	423,346
Gross profit	81,474	193,887	146,684	354,039
Operating expenses:
Research and development (exclusive of $0, $1,672, $0, $1,672 deferred stock compensation costs)	29,056	54,344	57,890	96,848
Selling and marketing (exclusive of $0,$491, $0, $491 deferred stock compensation costs)	20,331	38,782	38,453	68,418
General and administrative (exclusive of $0, $572, $0, $572 deferred stock compensation costs)	7,176	16,787	14,047	27,932
Deferred stock compensation costs	–	2,735	–	2,735
Amortization of goodwill	799	25,373	1,598	26,271
Amortization of intangible assets	110	1,000	219	1,109
In-process research and development	–	45,900	–	45,900
Total operating expenses	57,472	184,921	112,207	269,213
Income from operations	24,002	8,966	34,477	84,826
Interest and other income (expense), net	3,357	20,707	6,403	25,003
Interest expense	(89)	(7,128)	(185)	(7,215)
Income before income taxes	27,270	22,545	40,695	102,614
Provision (benefit) for income taxes	8,863	73,225	13,226	100,048
Net income (loss)	$ 18,407	$ (50,680)	$ 27,469	$ 2,566
Basic net income (loss) per common share	$ 0.07	$ (0.17)	$ 0.10	$ 0.01
Diluted net income (loss) per common share
and dilutive potential common share	$ 0.06	$ (0.17)	$ 0.09	$ 0.01
Weighted average basic common shares
Outstanding	280,162	306,329	278,600	296,758
Weighted average basic common and
dilutive potential common shares
outstanding	299,126	306,329	297,954	310,164

(more)

CIENA CORPORATION
ADJUSTED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

	Quarter Ended	Quarter Ended	Six Months Ended	Six Months Ended
	April 30,	April 30,	April 30,	April 30,
	2000	2001	2000	2001
Revenue	$ 185,679	$ 425,396	$ 337,892	$ 777,385
Cost of goods sold	104,205	231,509	191,208	423,346
Gross profit	81,474	193,887	146,684	354,039
Operating expenses:
Research and development (1)	29,056	54,156	57,890	96,129
Selling and marketing (1)	20,331	38,682	38,453	68,171
General and administrative (1)	7,176	16,337	14,047	26,878
Total operating expenses (1)	56,563	109,175	110,390	191,178
Income from operations	24,911	84,712	36,294	162,861
Interest and other income (expense), net	3,357	20,707	6,403	25,003
Interest expense	(89)	(7,128)	(185)	(7,215)
Income before income taxes	28,179	98,291	42,512	180,649
Provision for income taxes	9,158	32,927	13,816	60,517
Net income	$ 19,021	$ 65,364	$ 28,696	$ 120,132
Basic net income per common share	$ 0.07	$ 0.21	$ 0.10	$ 0.40
Diluted net income per common share
and dilutive potential common share	$ 0.06	$ 0.20	$ 0.10	$ 0.39
Weighted average basic common shares
outstanding	280,162	306,329	278,600	296,758
Weighted average basic common and
dilutive potential common shares
outstanding	299,126	319,166	297,954	310,164
(1) As adjusted is exclusive of the following charges:
Payroll tax on stock options	$ –	$ 738	$ –	$ 2,020
Deferred stock compensation costs	–	2,735	–	2,735
Amortization of goodwill	799	25,373	1,598	26,271
Amortization of intangible assets	110	1,000	219	1,109
In-process research and development	–	45,900	–	45,900
Total	$ 909	$ 75,746	$ 1,817	$ 78,035
Net effect on adjusted net income	$ 614	$ 116,044	$ 1,227	$ 117,566

CIENA CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)

	October 31,2000	April 30,2001
ASSETS
Current assets:
Cash and cash equivalents	$ 143,187	$ 1,144,212
Short term investments	95,131	357,163
Accounts receivable, net	248,950	267,011
Inventories, net	141,279	276,020
Deferred income taxes	143,029	142,290
Prepaid expenses and other	41,438	57,035
Total current assets	813,014	2,243,731
Long term investments	–	336,073
Equipment, furniture and fixtures, net	189,231	286,413
Goodwill, net	4,461	2,036,579
Other intangible assets, net	4,588	62,778
Other long term assets	15,907	64,849
Total assets	$1,027,201	$5,030,423

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$ 70,250	$ 115,410
Accrued liabilities	84,163	128,668
Income taxes payable	7,483	7,231
Deferred revenue	10,731	18,149
Other current obligations	712	1,113
Total current liabilities	173,339	270,571
Deferred income taxes	39,145	39,554
Convertible notes and other long-term obligations	4,882	864,193
Total liabilities	217,366	1,174,318
Commitments and contingencies
Stockholders’ equity:
Preferred stock – par value $0.01; 20,000,000 shares authorized;
zero shares issued and outstanding	–	–
Common stock – par value $0.01; 980,000,000 shares authorized;
286,530,631 and 326,454,240 shares issued and outstanding	2,865	3,265
Additional paid-in capital	557,257	3,703,524
Deferred stock compensation	–	(95,721)
Notes receivable from stockholders	(30)	(7,784)
Accumulated other comprehensive income (loss)	(903)	(391)
Retained earnings	250,646	253,212
Total stockholders’ equity	809,835	3,856,105
Total liabilities and stockholders’ equity	$1,027,201	$5,030,423

Disclaimer

If you are a client of ours, and if you have questions regarding CIENA, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate CIENA from our portfolios. This report is dated May 17, 2001; it is possible that by May 17, 2001 we could have eliminated our entire CIENA position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have CIENA in their portfolios. There could be various reasons for this. Examples of which could be, cash flow concerns, no funding available or identified as available and / or specific risk tolerance levels. Again, if you would like to discuss Lucent Technologies, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).

Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment 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.

CIENA Corporation CIEN Q2’01 Conference Call Notes May 17, 2001