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Tuesday, August 01, 2006

Ciena: Damned With Faint Praise

Stocks: (CIEN)(ALA)(NT)

The folks at UBS were good enough to raise Ciena from "reduce" to "neutral" last week. Mangement of the communications and network equipment supplier partied in the streets.

Ciena has been doing a bit better. Revenue in the quarter ending April 30 was $131.2 million. Each of the quarters since the July 2005 period have had solid top line growth. And operating losses have dropped. From January 30, 2006 to April 30, the operating deficit dropped by approximately half to $7.3 million.

The company remains unloved. On a good day, the stock breaks $3.50. In March it was at $5.62. However, the company may be on the cusp of seeing its business improve markedly as
demand for optic equipment increases as broadband provider, especially the telcos, bring fatter pipes online.

According to Morningstar, Ciena has $1 in net cash per share, which means a bet on the company is less risky than it appears at first.

While the company faces competition from much larger companies like Alcatel and Nortel, it would not require much of an increase in revenue for the company to be cash-flow positive.

A look at the most recent quarter a gross margin of 48%. On that basis, with current expenses, at $150 million in revenue, Ciena mkes money. And, that is not far to go.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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