Worst 10-year performers: Ciena Corporation's still waiting for that telecom turnaround

When Ciena Corporation debuted in February 1997, it did so as the largest stock offering by a start-up company in history. The shares soared so quickly on their first day of trading, they attained a market capitalization of $3.44 billion overnight. Not too shabby -- particularly for a start-up with just three customers to depend on (foreshadowing alert!).

In June 1998, Tellabs announced that it would acquire Ciena for $7.1 billion in stock. A few months later, both companies saw their share price plunge when Ciena warned that the delay of a large order by one of its customers would slash its third-quarter earnings by more than half. Speculation hit the Street immediately that Tellabs would pull its buyout bid off the table.

Less than an hour before both companies were scheduled to hold shareholder meetings to vote on the deal, in August 1998, AT&T (NYSE: T) announced it would not do business with Ciena. Previously, analysts had expected Ma Bell to buy some $100 million in equipment from the start-up. It was a crushing blow for CIEN, which shed 62% during August 1998. By September, Tellabs had decided to walk away from the acquisition.

The company dusted itself off and managed to rebound during the next few years -- but, by the end of 2000, industry-wide suffering eventually caught up. The shares plunged 38% in March 2001 after the firm swallowed a second-quarter loss of $50.7 million and warned of a third-quarter shortfall. Sales for the period more than doubled, but operating costs had roughly tripled. With its own acquisition hopes dashed, Ciena had turned instead to buying other companies, and racked up quite a tab in the process.

Ciena eventually scored an AT&T contract in May 2001, but by then, sector-wide pressures were inescapable. In August, the company warned that profits for 2001 and 2002 would fall short of estimates due to waning demand. By November, Ciena was forced to trim its payroll to control costs; further job cuts were announced the following January, along with another profit warning.

In May 2002, investors learned that the company took a massive quarterly loss as demand for its products continued to evaporate. Ciena's chief executive, Gary Smith, didn't even bother to feign optimism. He admitted, "We cannot pretend to know when the telecommunications industry will recover."

What next? You can't fault Smith for his candor; as predicted, quarterly losses continued to roll in for years. More recently, Ciena's performance has improved. In each of the past 4 reporting periods, the company's profit has exceeded analysts' expectations, according to First Call.

Unfortunately, this doesn't necessarily mean the stock is doing well. CIEN tapped a new annual low of $19.30 as recently as July 16, when Credit Suisse handed out downgrades across the telecom sector. CIEN was dropped from "outperform" to "underperform," as the brokerage firm warned that a reduction in capital spending by carriers could pressure equipment suppliers. And, on July 18, the company warned investors it would take an unadjusted third-quarter loss of $5 million to $6 million based on its holdings in two structured investment vehicles, or SIVs.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer's Investment Research. She is featured in the weekly video series Option Basics on SchaeffersResearch.com.