fibeReality’s latest intelligence indicates that Ciena took advantage of the ban earlier this year against ZTE, allowing the former to take a significant amount of market share away from the latter in emerging markets, including India. Ciena’s unexpected, substantial jump in revenues last quarter seemed to at least partially reflect this strategy. However, the supplier may wind up paying a very high price for its short-term gains, especially in apparently gambling that the prohibition would remain in place for a long time. Like too many others, Ciena’s executives failed to see what should have been obvious -- that the Trump administration’s game plan has been to use sanctions and tariffs in order to bargain for better trade arrangements, not to come close to permanently keep them in place. Once again, we were not concerned about ZTE’s long-term viability. The problem now is that Ciena raised the stakes. While the vendor has gone head to head with Chinese vendors around the world, there has been a clear-cut certitude with the mutual understanding they would be protected within their own home countries by the central governments. With Ciena aggressively taking away international business from ZTE resulting from a different kind of federal action, the latter (along with the backing of the Chinese government) will likely retaliate in striving to go beyond just battling to win back share, but to possibly try to take away other deals from the US company. This new clash could get intense as Ciena’s actions in this case may tend to be viewed as an extension of an attack on its market on the mainland.
We have argued that one of the major reasons for the establishment of the three-year outlook was to prevent Ciena’s leadership in Maryland from its historic propensity to make precipitous decisions in a particular quarter, which would have long-term negative ramifications for the company. However, we would not be surprised, if such low-hanging fruit could be resisted by the Canadian executives, who tend to run the firm. Yet, this rather lethargic way of getting additional sales was not the only option.
Once again, Infinera is in a terribly weakened state, and we have pointed out that all service providers have to definitely consider capping their installed base of any gear from this supplier. Clearly, it is still a harder sell to displace an incumbent player. Nevertheless, it would behoove Ciena to tone down the level of arrogance in dealing with customers (we have been receiving feedback on the attitude being expressed by the manufacturer, which has alienated some buyers) to not only make greater inroads into Infinera’s accounts, but others as well.
In contrast, Ciena will now have to deal with a somewhat greater threat from ZTE than usual. In addition, Ciena’s margins could be adversely affected to the extent that ZTE should be counted on to more forcefully undercut on price as part of its vengeance effort.
On a related subject, given the current situation, Ciena’s continuing insistence, including at the CITI 2018 conference last month, that it could potentially get Chinese system vendors to buy its DSP modules, is more ridiculous now. As we discussed earlier, despite claims to the contrary in a recent article, the vendor did not demonstrate that it was serious about selling its technology on a license basis. Until the industry sees a major change in Ciena’s limited outlook for such an opportunity, the presumption should be that any revenue will remain modest in nature.
In the meantime, Ciena is evidently using market analysts to push a narrative that it is more earnestly looking at the prospect at selling these components itself. We guess, at a bare minimum, Ciena thinks it will be looked at in a positive way by the Street.
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[written by Mark Lutkowitz]