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Thursday, August 31, 2006

Ciena's Tough Call

Ciena announced earnings today. Its forecast, like that of JDS Uniphase and ADC Telecom, two competitors, was not rose. After Ciena's revenues rose 16% over the immediately previous quarter to $153 million, the company forecast an increase of only 5% for the next quarter-over-previous quarter figure. The company's operating loss improved marketly for the quarter ending July 31, from $53.5 million last year to $12.8 million in the most recent quarter.

In early trading before the market opened, the stock was flat at $4.33.

The more troubling news from Ciena is that it will set a 1-for-7 reverse split to get the price of its stock up, in the hopes of appealing to more institutions which often will not buy shares that trade below $5. Unfortunately, stocks have a history of dropping after reverse splits. As MSNBC said yesterday: "Reverse stock splits also have a spotty history." Or, as Small Cap Sentinel pointed out: "Often times a reverse split leads to the company's market cap rescinding as the stock price seeks its previous value."

Ciena's results may not move the stock down much. Guidance may have been weak, but that may be offset by an improving bottom line.

But, when the reverse merger takes effect, the stock may fall.

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

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