Ciena Beats on Q1 Earnings, Misses Rev

Zacks

Ciena Corp. (CIEN) reported mixed first-quarter 2014 results and gave a cautious second-quarter outlook. The telecom equipment maker reported earnings of 13 cents per share (excluding share-based compensation and other one-time items), slightly better than the year-ago earnings of 12 cents.

However, deducting share-based compensation, earnings came in at 2 cents per share, which beat the Zacks Consensus Estimate of a loss of 1 cent.

Revenues

Revenues jumped 18.0% year over year to $533.7 million, which lagged the Zacks Consensus Estimate of $534.0 million. Revenues also beat the mid-point of management’s guided range of $515.0 to $545.0 million. Orders were up 7.0 % on a year-over-year basis.
 
Product revenues (81.1% of revenues) rose 22.6% from the year-ago quarter to $432.9 million. Services revenues (18.9% of revenues) climbed 0.7% year over year to $100.8 million.

Converged Packet Optical revenues surged 38.9% year over year to $333.4 million. Packet Networking increased 12.9% from the year-ago quarter to $51.7 million. Optical Transport revenues declined 30.4% year over year to $40.1 million. Software and services revenues decreased 1.1% from the year-ago quarter to $108.5 million.

During the quarter, Ciena and AT&T (T) began deployment of 6500 packet-optical product in metro segment of communications network. The company won 21 new 100-gig customers in the last quarter.

United States contributed 59.0% of the revenues, while international customers contributed 41.0% in the last quarter. One 10.0% plus customer represented 18.8% of the revenues. Verizon (VZ) was the largest 100-gig customer in the quarter.

In Feb 2014, Ciena and Ericsson announced a strategic partnership to collaborate on software-defined networking (:SDN) products. Under the terms, Ericsson will help cross-sellCiena's OTN switching products to its customer base. The company will also integrate Ciena's WaveLogic technology into its IP edge routers.

Operating Results

Gross margins (Including share-based compensation) contracted 120 basis points (bps) on a year-over-year basis to 43.2% due to unfavorable customer and product mix.

Operating expense as a percentage of revenues (including share-based compensation) declined 430 bps from the year-ago quarter to 44.0%. The year-over-year decline was primarily driven by a lower research & development expense (down 70 bps), selling & marketing expense (almost flat) and general & administrative expense (down 60 bps).

As a result of lower operating expense, Ciena reported operating income (including share-based compensation) of $20.4 million compared with $17.3 million reported in the year-ago quarter.

Interest expense of $11.0 million increased 2.8% on a year-over-year basis in the reported quarter.

Ciena reported net income of $13.7 million or 13 cents per share compared with $12.3 million or 12 cents in the year-ago quarter.

Balance Sheet

At the end of the first quarter of 2014, cash and cash equivalent (including short-term and long-term investments) was $440.1 million compared with $486.5 million in the previous quarter. Cash outflow from operations was $37.2 million in the quarter.

Guidance

Ciena forecasts revenues in the range of $540.0 to $570.0 million for the second quarter of fiscal 2014, much better than $508.0 million reported in the year-ago quarter.

The Zacks Research Estimate is currently pegged at $560.0 million, slightly higher than the mid-point of the company’s guidance range.

Adjusted gross margin (excluding one-time operating items) is projected to be at the lower range of 40%, lower than the first-quarter gross margin. Ciena expects adjusted operating expense of approximately $210.0 million for the second quarter. Management forecasted that second-quarter operating expense will be higher than the full-year average.

Management expects order flow to increase from the first quarter and remain strong during 2014. Ciena continues to expect average operating expense of $205.0 million for fiscal 2014. The company expects to achieve the lower end of its operating margin target range of 7.0% to 10.0% for the fiscal year.

Our Take

Ciena provided cautious second-quarter margin guidance, which may remain an overhang on the stock in the near term. Higher operating expenses continue to remain a concern.

Although Ciena expects to improve its operating leverage, we believe any decline in top-line growth particularly due to stiff competition from Cisco (CSCO) and Alcatel-Lucent S.A will negatively impact profitability, going forward.

Nevertheless, we believe increasing spending on optical upgrades and higher number of orders from international customers will boost top-line growth in fiscal 2014. Moreover, the company’s Tier 1 contract wins and strong backlog are expected to boost near-term results. Further, the partnership with Ericsson is a significant positive that will drive international revenues in the long run.

Currently, Ciena has a Zacks Rank #3 (Hold).

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