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Ciena Continues to Feel Pressure From Weak Carrier Spending

NEW YORK (TheStreet) -- On Thursday, optical networking giant Ciena (CIEN - Get Report) will report financial results for its second quarter. Ciena shares closed Tuesday at $18.82, up almost 1%.

With shares down over 21% for the year to date, investors are still punishing the stock after management issued worst-than-expected guidance back in March.

The company specializes in broadband, data networking and optical equipment services. Ciena's main customers include, among others, Verizon (VZ) and AT&T (T). These are, without a doubt, strong names. The problem, however, is Ciena relies a bit too much on their capital investments.

Over the past couple of years, the entire telecom sector has spent very little to upgrade its infrastructure, which has also impacted upon rivals such as Cisco (CSCO) and Juniper Networks (JNPR). There have been some modest spending improvements in the U.S., but it hasn't been nearly enough to offset weakness in other parts of the world.

Thursday, the Street will be looking for stronger signs of progress. Ciena is expected to post 13 cents in earnings per share on revenue of $559.18 million. The company has performed well over the past several quarters. Management has delivered an earnings beat in three of the past four reporting periods, including beating adjusted earnings in the March quarter by 116%.

That, however, hasn't stopped analysts from cutting estimates for this current quarter. To offset the revenue headwinds, Ciena has been working to improve its operational efficiency, which has resulted in a better-than-expected rise in cash flow.

What's more, the company's converged packet optical division continues to outperform expectations. That business now accounts for 63% of Ciena's total revenue, demonstrating how well-diversified Ciena's total operation has become.

Also lost in the downbeat guidance was Ciena is still posting solid order growth. The company is not known to be the cheapest networking vendor. That customers are willing to pay more, even amid weak spending periods, underscores how well-differentiated Ciena's products and services are from its competitors.

This means that if/when carriers finally do open up their wallets, Ciena remains well-positioned to capitalize on that spending. While Cisco does remain a worthwhile threat, Ciscos' advances in software-defined networking won't match Ciena's cutting-edge approach to optical networking and traditional packet switching.

The only risk here, and it's a big one -- Ciena's growth goes hand-in-hand with carrier spending. There's also the chance that Cisco and possibly Juniper can apply pricing pressure on Ciena's margins.

Even so, with lowered expectations already in hand for this quarter and possibly next quarter, that risk is already priced into the stock. I think investors with patience have an opportunity here to cash in on a long-term value play.

With shares down 22% year-to-date, an improved spending environment in the second half supports a price target of $22 per share.

At the time of publication, the author held no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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