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CIENA Reports Final Fiscal Third Quarter Results; Issues Cautious Short-Term Outlook

Ciena Corporation (NASDAQ: CIEN) today reported final results for its third fiscal quarter ended August 1, 1998, in-line with its previously announced expectations.

Revenue for the quarter totaled $129.1 million. This compares with $121.8 million in revenue reported for the third fiscal quarter of 1997. Net income for the quarter was $16.1 million, or $0.15 per share, exclusive of one-time charges associated with Ciena's previously announced settlement with Pirelli and costs related to the proposed merger with Tellabs. This compares with net income for the third fiscal quarter of 1997 of $35.7 million, or $0.34 cents per share. 1

For the nine months ended August 1, 1998, revenue increased to $416.9 million from $283.1 million for the first nine months of 1997. Net income for the period was $86.8 million, or $0.81 per share, compared to $81.1 million, or $0.78 per share, for the same period in 1997, once again, excluding the effect of one-time charges for purchased research and development and merger costs in 1998 and additional expense accruals pertaining to the Company's litigation with Pirelli in both 1997 and 1998.¹

Net income and earnings per share amounts reported in the attached consolidated statement of operations are inclusive of the effects of one-time charges and litigation expenses. All earnings per share amounts represent diluted earnings per share as defined within Statement of Financial Accounting Standards No. 128 (SFAS 128).

"As we discussed previously, Ciena's gross margins during the third fiscal quarter were impacted by the combination of price concessions to a strategic customer in return for higher volume commitments, and lower than expected overall volume during the quarter," said Ciena's Senior Vice President, Finance and Chief Financial Officer, Joseph Chinnici. "In light of continued evidence that our competitors are heavily discounting their prices in an attempt to gain a market presence, we're adjusting our long-term gross margin target model range to 45 to 50 percent."

"During the last year Ciena grew its manufacturing infrastructure to accommodate a higher level of business than we will realize in the near-term; as a result it is likely that unabsorbed manufacturing overhead will pull gross margins below the target model short-term," continued Chinnici. "Provided volumes increase as we progress through fiscal 1999 as we currently expect, unabsorbed manufacturing overhead will diminish in significance. We also expect to continue our focus on lowering material costs and reducing the costs in our products through ongoing engineering efforts in order to partially mitigate the potential negative impact of pricing pressure on gross margins."

Ciena continued to make positive progress toward its goal of diversifying both its product and customer base during the quarter, announcing and shipping to a total of 11 customers including two new customers: Telecom Developpment and Racal; both of which are expected to contribute to revenue during fiscal year 1999.

Commenting on his expectations for Ciena's fiscal fourth quarter and fiscal year 1999, Patrick Nettles, Ciena's President and Chief Executive Officer, said: "Feedback received from our sales force indicates that the uncertainty created by the events of the last few weeks and attempts of our competitors to capitalize on that uncertainty may delay or alter some customers' near-term purchase decisions. As a result, and due to the loss of expected incremental business at DTI, we believe fiscal fourth quarter revenues and operating results will be materially below those reported for the third fiscal quarter. In addition, while visibility is, as always, very limited beyond the next quarter, we are now resetting our fiscal 1999 business model at a level that anticipates modest growth in year-over-year revenue and net income."

"Going forward, we intend to restore shareholder value as quickly as possible by: 1) continuing our proven record of rapid product introduction and technology innovation that enables our customers to simplify their networks and lower the cost of bandwidth; 2) driving down costs in our products to help us achieve and maintain solid margins, and; 3) bolstering our sales and marketing efforts," said Nettles.

In a separate press release made today, Ciena announced it has restructured its sales and marketing organization to better address the rapidly evolving DWDM market opportunity and the company's growing customer base.

"There is no doubt that the next several quarters will be challenging for Ciena as we work to rebuild shareholder value," said Jon Bayless, Ciena's Chairman of the Board. "The company has recently experienced first-hand a number of the risks we've regularly discussed as being inherent in growing a dynamic business in an industry dominated by large competitors. Ciena's Board of Directors has complete confidence that Ciena's management team will restore positive momentum and lead this company through the challenges it faces during its next important phase of development."

In conclusion Nettles said: "As an emerging company, Ciena has battled the underdog status for most of its corporate life. As a team, our employees have faced and conquered enormous hurdles and their spirit is unyielding. Ultimately, it is these highly motivated people, our field-proven products, and our industry-leading technology that will enable us to capitalize on the opportunities ahead."

¹ Past financial results have been restated to reflect the consolidated results of Alta Telecom, Inc., acquired by Ciena on February 19, 1998.