While Ciena didn't do itself any favors or instill the Street's confidence by issuing lower-than-expected guidance, I wouldn't get carried away here. Given that this company provides broadband, data networking and optical equipment services to Verizon , AT&T and Sprint , this is still a story about carrier spending (something these same analysts predicted would return in 2013). That never happened. At least not to the robust levels they expected.
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While some questioned whether Ciena, competing with bigger rivals like Cisco and Juniper , could ever survive the weak carrier spending environment, the company's management has done an exceptional job of growing both revenue and free-cash-flow. Ciena has been able to post consecutive quarters during which the company beat estimates and raised guidance.
More impressive was that Ciena's recent performances occurred amid rumblings about would "needing" Ciena as much following Verizon's deal with Vodafone . In that regard, I don't believe the company's management has gotten the credit it deserves. Even with the downbeat guidance, let's not overlook that revenue in the recent quarter advanced 25% year-over-year and 8% sequentially, besting Street estimates by 3%.
The better-than-expected performance was helped by tremendous growth in areas like Converged Packet Optical and Software and Services (up 60% and 20%, respectively). Ciena's top-line and order growth continue to exceed management's own estimates. Why, then, is the Street overreacting to nothing more than cautious guidance?
Besides, it's not as if Ciena's projections and tenor sway drastically from what we've heard from Cisco. So while I've always been in the "glass-half-full" camp when it comes to the telecom sector, I never believe that any one company can manufacture growth or profits when there aren't any to be had. At least not until the likes of Verizon and AT&T stop starving themselves.
Ciena's perceived lack of margin leverage is something that I talked about following the company's September quarter. I'm not going to pretend that Ciena's margins, which was lower again this quarter, has been exceptional. But companies don't often boast 25% revenue growth on the backing of many large deals without making some concessions.
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Essentially, some margin weakness could have easily been predicted ahead of Ciena's report. Yet, as the Street is known to do, this brand of logic seems to have been conveniently forgotten. Now don't misinterpret this as my suggesting that investors should jump into this stock and pretend that there are no risks. But I've seen no meaningful signs of anything that is close to being a fundamental deficit.
Company's growth and profits remains strongly predicated on carrier spending; that is some cause for anxiety. But in some respects, that's also the case for Cisco, Alcatel-Lucent , Ericsson , Nokia and several other telecom giants. The question, though, is which one(s) is better positioned to capitalize on the spending recovery when it finally emerges.
As with several of its rivals, Ciena is far from flawless. But with revenue growth having reaccelerated in each of the company's segments, I don't believe there is a better telecom operator out there that combines the growth and profit capabilities that Ciena brings. With shares trading at around $23 per share, I continue to project fair market value to reach $30 per share by the second half of 2014.
At the time of publication, the author was long AAPL.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.