Maryland IPO debuts at $23, surges to $37 Savage-based Ciena is toast of Wall Street; $115 million raised; If you had it, smile; Company's technology improves efficiency of long-distance networks

Ciena Corp., an obscure, Savage-based company that sold its first products only six months ago, became the toast of Wall Street yesterday, as it rode a wave of demand for its shares in an initial public offering that rocketed the company's value to $3.4 billion by day's end.

The 4-year-old company raised $115 million as it sold 5.4 percent of its shares at $23 apiece, but the shares took off at the opening of the market yesterday and rose $14 to close at $37. Until last week, Ciena had projected that the offering would command only $17 to $19 per share.


"This is the best initial public offering so far this year," said Kathleen Smith, a portfolio manager for Renaissance Capital Corp. in Greenwich, Conn., a boutique firm that follows the IPO market. "Some start-up, isn't it? There's an expectation that revenues for [fiscal] 1997 will be several hundred million dollars."

The reason for all the excitement is that Ciena makes equipment that makes long-distance phone networks much more efficient.


Its technology lets a single fiber-optic cable carry 16 times more voice, data and graphic information than it could before, offering solution to carriers who are increasingly trapped as the endless proliferation of fax machines, Internet transmissions and other new gadgets strains the capacity of long-distance networks that until recently was considered almost infinite. It also makes a network up to 16 times faster.

"People said a year ago that the long-distance networks had a lot of spare capacity, but today that's not true," said Rob Gensler, telecommunications analyst for T. Rowe Price Associates Inc., the Baltimore mutual fund house.

Ciena's big customer so far has been Sprint Corp., which accounted for all of the $54.7 million in sales that the Howard County company reported in the year that ended in October.

A Sprint spokesman said companies that make equipment similar to Ciena's face a bright future for a simple reason: it's a lot cheaper to buy that equipment, called a "dense wavelength division multiplexing" system, than it is to do almost anything else to boost Sprint's call-handling capacity.

"It is less expensive to install wave division multiplex equipment than it is to light up dark fiber [meaning, begin using fiber that is in the ground but not in use]," Sprint spokesman Charles Fleckenstein said. "To dig more fiber would be, whew!"

But yesterday's IPO bonanza reflects more than just Sprint's business. Ciena has an exclusive deal with WorldCom Inc., the nation's fourth-biggest long-distance carrier, to provide DWDM equipment through the end of 1997, and another contract with a Japanese carrier.

Smith and Gensler both said yesterday's stock action reflected a bet that more deals will come along soon, and that the technology will adapt to applications other than boosting long-distance networks.

"The bet is they'll get AT&T; and others," Gensler said.


Because companies such as Ciena can save customers so much money, they are free to charge premium prices for their products, Smith said, which means sales translate quickly into fat profits.

In Ciena's case, the $54.7 million in sales to Sprint during the year that ended in October produced net income of $14.7 million, even though the company had millions of dollars of overhead before it had any sales.

"It's a beautiful financial picture, and that's very unusual for an IPO," Smith said.

That picture has also translated into a burst of local hiring that is likely to continue, according to the company's filings with the U.S. Securities and Exchange Commission.

The company's staff expanded to 225 people in October from 49 the October before, Ciena reported.

The company manufactures some of its equipment in Savage, the prospectus said.


Company officials did not return calls seeking comment. SEC rules prohibit them from making most public statements around the time of the offering, which was led by investment banks including Goldman Sachs & Co. and Baltimore-based Alex. Brown Inc.

Despite its warm reception, however, the company faces significant risks. It competes with much larger companies, including Lucent Technologies Inc. and Northern Telecom Ltd., and faces a patent-infringement suit brought by its Italian-based rival Pirelli S.p.A.

Sprint's Fleckenstein added that some competitors have announced plans to offer systems that are even faster than Ciena's current product.

Even if Ciena can deal with all those risks, its rise yesterday may have moved its stock too high to be a good value in the short term, several analysts said. Its closing price equals 74 times Goldman Sachs' estimate of Ciena's likely 1997 earnings.

"Ciena's core business is really fascinating and utterly important," Gensler said. "It doesn't justify a $37 price though."

Ciena is at least the 20th Maryland company to go public since the end of 1995, most of them information-technology companies highlighting the rapid emergence of a high-tech industry in Maryland.


Pub Date: 2/08/97