Dow Jones 10070.49 + 72.10  4:30 pm EST, Wed., December 19, 2001  NASDAQ   1982.89 - 21.87  For info, visit access.smallcapnetwork.com .  S & P 500  1149.56  + 6.64  To be removed, please click here .  Russell 2000     482.07 - 3.42  VOLUME 01: ISSUE 22 Are There Bigger Problems Ahead For Ciena? It doesn't seem possible that things can get any worse for battered optical gear maker Ciena Corporation (CIEN).  Last week the company reported fiscal fourth quarter earnings. Revenues of $367.8 million for the quarter were a 27% increase versus the same period last year but it represents a quarter to quarter drop of nearly 20%.  Losses totaled a whopping $1.8 billion. Things have gotten so bad even Wall Street analysts have given up on the company.  According to First Call, the consensus recommendation for CIENA is 2.6 with 1=BUY, 3=HOLD, and 5=SELL.  Keep in mind that in Wall Street speak a HOLD Rating is a nice way to say "Get out of the stock". Ciena's business success depends entirely on demand for telecom equipment which does not bode well in a time when capital expenditures are being cut back dramatically. Ciena's three largest customers represented 67% of FY 2001 revenues. Sprint and Qwest Communications accounting for 50% of the Ciena's FY 2001 revenues of $1.6 billion.  However, both companies have announced major cutbacks in expenditures next year. Sprint (FON) will spend approximately $3.5 billion in 2002 which is 35% less than in 2001. Qwest (Q) has stated that it would reduce its capital expenditures for 2002 to $4.2 billion and $4.3 billion which is about a 40% decline from 2001.  The cutback in spending is just one problem looming over the sector.  Competition will only intensify as the optical companies fight for a smaller pie.  New products are being introduced that will squeeze the sector even more.  Alcatel (ALA) will introduce its latest optical gear to be used in telecom networks. Nortel Networks (NT) will start shipping its new products that will compete directly with Ciena's best-selling switches.  Pricing will be coming down which bodes well for the carriers but certainly will lead to some casualties on the equipment maker side.  For Ciena, there is a larger potential problem looming overhead that has been recently brought to light.  According to published reports, the company currently has $1.2 billion in cash and $900 million in debt.  This net cash balance of $300 million seems to be plenty but realize that Ciena does not plan on being profitable in all of 2002 and parts of 2003.  Friedman, Billings, Ramsey & Co. issued a report titled "Cash Flow Concerns" at around 3:00pm discussing Ciena's current plight. (For the record FBR has an Underperform Rating on CIEN) "Since the company is facing a prolonged downturn, we believe it could run through the net cash over the next 18 months.  At current run rates, the company could spend $250-$300 million in FY02, assuming capital spending and employment levels are flat versus FY01.  Cash flow losses could accelerate in FY02, unless the company reduces its workforce dramatically and closes down manufacturing facilities.  Ciena increased it debt-to-capital ratio to about 30% in FY01 from 0% in FY00.  New funding may be a difficult challenge, given the outlook in the services provider sector." SmallCap Digest subscribers should know our disdain for analysts.  Most are nothing more than cheerleaders while some analysts actually shock the public with their "analysis". Friedman, Billings, Ramsey & Co. has zero chance of ever raising capital for Ciena in the future.  This puts the analyst in a position where the handcuffs come off and the fear of losing out on a banking deal vanishes.  Unfortunately, it also means no fees are being generated to pay the bills which in due time means the analyst is out of a job. For an analyst to even suggest a company will run out of cash and be unable to raise additional capital means the "subject", in this case being Ciena, has problems deeper than the public perceives.  The SmallCap Digest is committed to bringing you information that can not only provide gains but also prevent losses.  In the case of Ciena, there will undoubtedly be short term spikes but whenever cash flow and insolvency issues are raised by Wall Street it usually means to head for the nearest exit.     D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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