Ciena ready to tout benefits of Nortel deal

When Ciena Corp. picked up Nortel Networks’ metro Ethernet and optical switching lines 18 months ago for US$769 million, industry analysts described it as a ‘bet the company’ move.

Ciena was a relatively small company with about two-thirds of its sales concentrated in the U.S., largely to carriers. Nortel’s metro and Ethernet optical business was larger and more international.

Over the next four weeks carrier and enterprise customers will trek to Ciena’s Ottawa research and development lab for its annual Vectors Summit to get look at how integrating technologies of the two companies has panned out and what’s coming in the next year.

The lab is now the Maryland company’s biggest of six around the world, just one of the benefits of the purchase. The deal has doubled Ciena’s revenue, letting it pick up customers like BCE Inc.’s Bell Canada [TSX, NYSE: BCE], Telus Communications and MTS Allstream. One of its newest Canadian customers is rural broadband operator Xplornet Communications. And now that revenue is split between U.S.-based customers and those from the rest of the world.

“We think it was a good asset for us, a good strategic decision, and we think the integration has gone quite well,” Tom Mock, (pictured) vice-president of communications and marketing said in an interview Thursday.

The people who count agree. “Customer feedback has been very positive in terms of the clarity and speed with which they rationalized the two portfolios and integrated the companies,” said Zeus Kerravala of ZK Research. “That’s never an easy process, particularly when you look at Nortel was a giant company and Ciena was a tiny, niche product company. Often integrating those kinds of companies can be difficult.

“It hasn’t gone perfect, but I’d given them a B+ or A-.”

Merging the Nortel’s business systems into Ciena’s is done, said Mock, product lines have been rationalized and the first steps have been taken in integrating Nortel and Ciena technologies into each other’s products.

For example, he said, Nortel’s high capacity Coherent optical technology has been put into Ciena’s optical transport products, while some Ciena switching technology has been folded into some of the former Nortel optical transport gear.

Still to come, however, is stitching together their network management software into a unified platform.

Also in the next 12 months, customers will be told, Ciena [Nasdaq: CIEN] will unveil its next-generation of 100 Gigabit per second optical transport line cards for the ActivFlex 6500 platform. New features and capabilities will be added to the carrier Ethernet hardware as well.

They’ll also see demonstrations of what Ciena believes is the future including what it says is a 100 Gbps elastic cloud service backbone that can run over long-haul distance, how to deliver uncompressed HD video over a 5,000 km submarine network; and the possibility of Terabit-per-second data transmission.

The future will also bring more jobs to Ontario. In January Ciena got a $25 million grant after the company promised to spend $900 million over five years to expand its R&D in the province. Ciena also has an R&D facility in Montreal.

If the picture sounds too rosy, it is: Ciena has gone though several quarters without showing a profit. Mock said some of that is due to economic conditions and integration costs.

While on a full accounting basis the company lost US$31 million in the quarter that ended July 31, on an operating basis it made money. “We’ve turned the corner on profitability,” he said. Ciena says in the fourth quarter it will start generating cash on an operating basis.

“One of the things we struggled with (before the Nortel deal) was having enough investment capacity to cover all the technologies we really thought we needed to provide the right infrastructure solutions to our customers,” Mock said.

It seems to have found it.

But, Kerravala warns, Ciena does have to improve its credibility — particularly for its enterprise products if it wants to increase sales to organizations. That includes differentiating itself from the dozens of metro Ethernet and optical switching equipment makers through partnerships with systems integrators, the analyst said.

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