Shares of Ciena Corp. CIEN were up 12.8% yesterday following strong second-quarter fiscal 2016 results. Adjusted earnings of 24 cents per share and revenues of $640.7 million easily topped the Zacks Consensus Estimate of 20 cents and $629.4 million, respectively.
The company’s CEO credited Ciena’s business diversification strategies and expansion into new regions as the driving force behind the strong results.
Quarterly Details
On a year-over-year basis, adjusted earnings fell over 11.1% whereas revenues were up 3.1%. The company’s non GAAP earnings came in at 34 cents, as against 35 cents reported in the prior year quarter.
Product revenues (81.8% of revenues) increased 2.4% year over year to $524 million. Services revenues (18.2% of revenues) increased 6.4% year over year to $116.7 million.
Networking platforms (79.9% of total revenue) rose 1.9% year over year to $512.2 million. Revenues from Software and software-related services (4.8% of total revenue) increased 27.6% year over year to $30.5 million. Global services revenues (15.3% of total revenue) grew 3.2% from the fiscal year-ago quarter to $98 million.
United States contributed 57.3% to revenues in the fiscal quarter, while international customers contributed the rest. One customer accounted for about 10% of revenues.
Ciena’s sales decreased 0.4% in North America and 5.9% in Europe, Middle East and Africa (EMEA), offset by increases of 20.9% in the Caribbean and Latin America and 22.6% in Asia Pacific.
Ciena reported adjusted gross margin of 45.1%, which increased 70 basis points (bps) year over year. Adjusted operating margin decreased 60 bps from the fiscal year-ago quarter to 10.3%.
Balance Sheet
At the end of fiscal second quarter, cash and cash equivalents (including short-term and long-term investments) were $1.1 billion compared with $926.1 million as of Oct 31, 2015. Ciena’s long-term debt was approximately $1.5 billion.
Ciena generated strong cash flow of $75.7 million in the fiscal quarter compared with approximately $59.9 million generated in the prior-year quarter.
Guidance
Ciena also provided its guidance for the third quarter and reiterated its outlook for fiscal 2016.
Revenues for the third quarter of fiscal 2016 are forecast in the range of $655 million to $685 million. Non-GAAP gross margin is projected in around mid-40%. Non-GAAP operating expense was projected at approximately $225 million.
For fiscal 2016, Ciena continues to project revenue growth in the range of 5% to 8%. The company expects increased macroeconomic volatility and soft demand in the EMEA region to negatively impact sales in fiscal 2016. Non-GAAP gross margin is still expected in the mid-40% range. Ciena expects non-GAAP operating expense of approximately $225 million per quarter (on an average) for the three fiscal quarters. Non-GAAP operating margin is now expected in the range of 10% to 12%.
Our Take
We believe that despite the short-term headwinds, higher spending on optical upgrade and increasing orders from international customers will improve Ciena’s top line going forward. Additionally, the diversification of its customer base and expansion of the addressable market will act as major growth drivers. 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 growth opportunities for the company.
Moreover, Ciena’s focus on cost-cutting initiatives is expected to boost its bottom line.
Nonetheless, Ciena’s highly leveraged balance sheet may affect its profitability. Moreover, the company is expected to be impacted by global macroeconomic uncertainty and intense competition from Cisco CSCO Juniper Networks JNPR and its other peers.
Ciena carries a Zacks Rank #3 (Hold). A better-ranked stock in the same space is Oclaro, Inc. OCLR, carrying a Zacks Rank #2 (Buy).
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