Ciena's (CIEN) Q1 Earnings Beat Estimates, Revenues Miss - Analyst Blog

Ciena Corp. CIEN recently reported first-quarter fiscal 2015 results. Adjusted earnings came in at 3 cents per share (excluding share-based compensation and other one-time items), much better than the Zacks Consensus Estimate of a loss of 6 cents. Earnings also improved from 2 cents reported in the prior-year quarter.

 

Ciena Corporation - Earnings Surprise | FindTheCompany

Following the earnings release, the stock moved up temporarily. However, the momentum could not be sustained. In yesterday’s trading session, Ciena closed at $20.83, a tad higher than $20.64 on Mar 5.

Revenues

Revenues declined 0.8% year over year to $529.2 million and also missed the Zacks Consensus Estimate of $562 million. Revenues also failed to meet management’s guidance of $540 million to $570 million. The decline was owing to delayed orders from the government sector and adverse foreign currency translations owing to a strengthening U.S. dollar.

Product revenues (79.8% of revenues) declined 2.5% on a year over year basis to $422.3 million. Services revenues (20.2% of revenues) climbed 6% year over year to $106.8 million.

Converged Packet Optical revenues (63.6% of total revenues) inched up 1% year over year to $336.6 million. Packet Networking (10.4% of total revenues) rose 6.4% from the year-ago quarter to $55 million. Software and services revenues (21.8% of total revenues) increased 6.3% from the year-ago quarter to $115.3 million. Optical Transport revenues (4.2% of total revenues) however plummeted 44.4% year over year to $22.3 million.

United States contributed 56.3% of the revenues in the quarter, while international customers contributed 43.7%. One customer represented 22% of the revenues. The company’s collaboration with Ericsson ERIC is a key catalyst for international expansion.

Operating Results

Gross margin (Including share-based compensation) increased 70 basis points (bps) on a year over year basis to 43.9% driven by reduced expenses and favorable product mix. Operating margin (including share-based compensation) increased 230 bps from the year-ago quarter to 46.3%.

Ciena reported net income (including share-based compensation) of $2.9 million compared with $2.5 million reported in the year-ago quarter.

Balance Sheet

At the end of the quarter, cash and cash equivalents (including short-term and long-term investments) were $799 million compared with $777 million in the previous quarter. Ciena’s long-term debt stands at approximately $1,275 million.

Cash flow from operations was $22.1 million compared with $37.2 million cash used in the prior-year quarter.

Guidance

Ciena forecasts revenues in the range of $585 to $615 million for the second quarter of fiscal 2015. The Zacks Consensus Estimate is currently pegged at $599 million.

Non-GAAP gross margin is projected to be between 42% and 43%. Ciena expects non-GAAP operating expense of approximately $210 million for the second quarter.

Our Take

We believe increasing spending on optical upgrades and higher number of orders from international customers will boost Ciena’s top line going ahead.  Additionally, the diversification of customer base and expansion of the addressable market will be a major growth driver going forward. Growing demand for cloud-based on demand networking capabilities is also likely to bode well for the company. Mobile bandwidth consumption is expected to rise phenomenally, thereby providing more growth opportunities for the company.

In the reported quarter, Ciena received contracts from major telecommunication players like Windstream Holdings, Inc. WIN which is likely to drive growth going forward. The company is also optimistic about another major contract win. However, we will have to wait and see.

Nonetheless, Ciena’s highly leveraged balance sheet may adversely affect its profitability going forward. Moreover, we believe that any further decline in the top line, particularly in the wake of stiff competition from Cisco CSCO, Juniper Networks and others can weigh on its financials.

Ciena has a Zacks Rank #2 (Buy).

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