Ciena Corp. (CIEN) reported fiscal third-quarter 2014 earnings of 25 cents per share (excluding share-based compensation and other one-time items), which beat the Zacks Consensus Estimate by a nickel. Earnings per share (EPS) were also better than 16 cents reported in the year-ago quarter, primarily driven by robust revenue growth.
However, Ciena’s fourth quarter revenue outlook disappointed due to uncertainty in the timing of potential orders. The company also said that the concession given to AT&T (T) in their recent orders, will negatively impact revenue growth in the next quarter.
Although the cautious guidance is expected to remain an overhang on the stock, the encouraging result drove up share price by 4.7% (87 cents) to close at $19.38 on Sep 5.
Revenues
Revenues jumped 12.1% year over year to $603.6 million, which beat the Zacks Consensus Estimate of $601 million. Revenues also beat the mid-point of management’s guided range of $585 to $615 million.
Product revenues (82.2% of revenues) rose 13.4% from the year-ago quarter to $495.9 million. Services revenues (17.8% of revenues) climbed 6.7% year over year to $107.7 million.
Converged Packet Optical revenues surged 63.3% year over year to $382 million. Packet Networking increased 11.5% from the year-ago quarter to $69.5 million. Optical Transport revenues increased 5.1% year over year to $31 million. Software and services revenues increased 20.1% from the year-ago quarter to $121.1 million.
United States contributed 61% of the revenues, while international customers contributed 39% in the last quarter. One customer represented 21.6% of the revenues. AT&T and Verizon (VZ) were two of Ciena’s top carrier customers in the quarter.
During the quarter, the company launched 8700, a new platform for multi-terabyte packet switching that fundamentally changes the economics of metro networks. Moreover, the software suite called Agility, which is further expected to enhance Ciena’s SDN solution and diversify its product offerings, was also launched during the third quarter.
During the quarter, Ciena was selected by AT&T to be the primairy supplier 2.0 domain.
Operating Results
Gross margin (Including share-based compensation) expanded 70 basis points (bps) on a year-over-year basis to 44.1% due to favorable customer and product mix.
Operating expense, as a percentage of revenues (including share-based compensation), declined 120 bps from the year-ago quarter to 35.8%. The year-over-year decline was primarily due to lower research & development (down 110 bps) and selling & marketing (down 40 bps) expenses.
Ciena reported operating income (including share-based compensation) of $50.3 million compared with $34.4 million reported in the year-ago quarter .
Ciena reported net income of $30.0 million or 25 cents versus $16.3 million or 16 cents in the year-ago quarter.
Balance Sheet
At the end of the third quarter of 2014, cash and cash equivalents (including short-term and long-term investments) were $532.9 million compared with $430.2 million in the previous quarter. Cash flow from operations was $16 million compared with $2 million in the prior quarter.
Guidance
Ciena forecasts revenues in the range of $570 to $610 million for the fourth quarter of fiscal 2014. The Zacks Consensus Estimate is currently pegged at $600 million, higher than the mid-point of the company’s guidance range.
Adjusted gross margin (excluding one-time operating items) is projected to be in the high 30s to low 40s percentage range. Ciena expects adjusted operating expense of approximately $210 million for the fourth quarter.
Ciena continues to expect average operating expense of $205 million for fiscal 2014.
Our Take
Ciena expects to improve its operating leverage going forward. However, we believe that any decline in top-line growth particularly due to stiff competition from Cisco (CSCO) and Alcatel-Lucent S.A will negatively impact profitability..
Nevertheless, we believe increasing spending on optical upgrades and higher number of orders from international customers will boost top-line growth in fiscal 2014 and beyond. Moreover, the company’s Tier 1 contract wins and strong backlog are expected to boost near-term results.
Additionally, the diversification of customer base and expansion of the addressable market will be a major growth driver going forward. Further, the partnership with Ericsson is a significant positive that will drive international revenues in the long run.
Worldwide demand for optical gear is continuously on the rise and we believe that Ciena has got robust international projects in its pipeline, which further strengthen its position to fully utilize this opportunity.
Currently, Ciena has a Zacks Rank #3 (Hold).
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