Just parsed through the Ciena CC transcript. Nothing in that report would justify yesterday's poleaxing.
Seems like its almost Pavlonian the way the short sellers aggressive pound the optical stocks post earnings, no matter how good they are. Could you imagine this happening to CSCO? If this were CSCO's results, the stock would be up 12% (not down) and there would be upgrades galore. The analysts would review the guidance and dismiss it as "conservative".
For Christ sake, here's what I see in that CC transcript:
-CIEN talks about 08' being "a year of focus and leverage". To me, the "leverage" part says margins should remain high as demand for CIEN's products continue to be strong and cost efficiencies will be yielded from ramping sales.
- CIEN management explicitly said "VISIBILITY IS AS GOOD TODAY AS IT WAS ON ANALYST DAY". That was before this beautiful Q we just saw, even got started. Management says visibility is less clear in the second half of 08' vs. the first half - DUH! Whenever is this not the case. There was no statement or hint that any slowdown is on the horizon.
-CIEN goes conservative as says expect GM's in the high 40's for Q1 and a dropoff to the mid-40's later in the year; but then management says it could be wrong 6 months out and GM's could actually be higher. (Sandbagging 101)
- CIEN says expect this upcoming Q1 to match last Q's beautiful 15.7% operating margin.
- CIEN is correcting issues with its service business. Two Q's ago, those margins were 0%; this Q, its 13%; and going forward, Management is predicting 18-22%. And even this may prove conservative as management said service margins at one time were in the 30-35% range.
- CIEN is paying down debt - $542 million of convertibles in February. (Might this cause some shortcovering of the common?)
- CIEN sandbagged yet again and said expect 20% revenue growth for 08'. Management has been sandbagging on the revenue projections for several Q's now. Indeed, CIEN just reinterated the 20% projection of 08' at the last CC. What has changed? The projected number is low and they will easily be on tract to surpass it by next Q (5% sequential growth: a repeat of last Q is projected for Q1)
- The SIV exposure is contained to $45 million; a drop in the bucket for a company with $1.7 billion in cash.
- When are the analysts going to say, OK guys, you're trying to be AAPL and upgrade them, post earnings. At some point (maybe next Q), the results will force this to happen. Indeed, CIEN's stock price today is stuck right where it was before the last two blowout Q's.
- And, of course, as to the "short pile on", we know that: a) CIEN's stock price initally dropped on last Q's blowout results; and b) short interest was at 12% at the end of November and is probably even higher now.
-If there is a criticism here, it is this: when is management going to trap the shorts? A hefty stock buyback should help do the trick. Management knows better than anyone that biz is really good; why not buy back CIEN's bargain basement stock price in the high $30's.
All in all, this is a screaming buy in the same way AAPL last January, when it dropped from $100 to the high $70's after a blowout upside Q; when the biz pipeline was smoking; when management sandbagged on guidance for the upteenth time; and when the stock price was stuck in neutral after two blowout Q's. Sound familiar?
I agree with just about everything in Normboyz post (and I'm long the stock) but here's the problem with yesterday's call:
Either management is badly sand bagging the projections (hopefully the case) or they know something that the rest of us don't. They seem highly confident for Q1 and Q2 saying that Q1 should grow 5% sequentially to $227. If Q2 were to also to grow 5% sequentially to $238, that would give them first half revenues of $465. If 2008 revenue growth is 20% (a big if, but that's what they're sticking to) that implies full year revenues of $936. Subtract first half revenues of $465, and the second half would come out at $471, which is not very impressive for a high growth company. Combine that with gross margins that they say are likely to decline from the current 50% level to the mid-40%'s (again likely sand bagging) and, on a sequential basis, you would have slightly declining earnings in the second half of the year. That is not a profile that institutional growth investors are looking for and, as a result, they are dumping the stock.
Management did (once again) a horrible job on giving guidance (could they not have given a range for 2008 growth of say 20-25% or 20-30% and then tighten it as we get in to Q1 and Q2?). If you believe what they say, then we're six months away for a period of slowing growth and declining profitability. I don't believe that's the case, but obviously many institutional investors feel differently. It's a bad position to be in when taking management at their word paints the stock as a poor high growth investment (but hey, with where the stock is trading we're quickly approaching a value play).
Personally, I think that 2008 will turn out to be similar to 2007. A year ago they also predicted 20% growth for the year ahead and that turned out to be 38%. Growth will likely be much higher than the 20% stated but, until they're willing to give better guidance (maybe on the Q1 earnings conference call) or they announce a meaningful contract win, there appears to be few catalysts for this stock.
I'm holding my shares and waiting, it's just a shame that management has put us in this position by another poorly handled conference call.
A good buddy of mine just pointed something out to me regarding my CIEN/CSCO comparison.
The market's reaction to CIEN's earnings is almost identical to that of CSCO's a month ago. CSCO also had a beauty of a Q, but tempered their guidance with a conservative caveat that future growth in 08' could be affected by the issues facing the US economy.
CSCO's stock got absolutely hammered dropping from $34 to $27; its now showing signs of recovery acting, very well the last few days. Could get back over $30 on the next market rally.
Sound fundamental will eventually matter. Enjoy the CIEN sale while it lasts.
I sold all my position between 46 $ and 49 $ . I expected a selloff even if the CC was good. But the CC was surprisingly good . I was surprised by the reaction of the Market. Now I am building again mu position. I have bought my first 500 shares yesterday at 58 $ . Today I will buy again . This is a beautiful company .
Don't confuse emotion with conviction.
But you have a point that timing is key. Right now, the negative macro issues with subprime and the recent PPI/CPI's numbers (the latter of which is rear view mirror and may be a one time event) trump CIEN's fundamentals right now.
And the shorts know it and are taking full advantage right now. Broken tackle and open field run for them. Not much different than BIDU for the bulls on the way up, just the mirror opposite.
But at some point the fundamentals do matter. Last January they didn't with AAPL when it dipped into the high $70's after two back-to-back blowout Q's on earnings.
Compare CIEN's trailing growth to RIMM's. Yes, CIEN's just as good.