Ciena Plunges: What Wall Street's Saying

NEW YORK (TheStreet) -- Ciena (CIEN) saw its shares tumble on Thursday after the wireless networking company forecast that sales for its October quarter would be lower than Wall Street estimates.

The Hanover, Md.-based company said fiscal third-quarter revenue rose 12% to $603.6 million. Ciena reported quarterly net income of $16.2 million, or 15 cents a share, a reversal from a year-earlier loss of $1.2 million or a penny a share, a year earlier. The company reported adjusted net income of $40.9 million, or 32 cents a share, compared to $26.2 million, or 23 cents a share, last year. Consensus estimates were calling for earnings of 29 cents on revenue of $600.8 million.

However, Ciena forecast revenue for its fiscal fourth quarter to be between $570 million and $610 million, lower than Wall Street estimates of $629 million, according to tallied estimates by Thomson Reuters.

Shares declined 8.2% to $18.78 at last check on volume that was more than double the company's three-month average daily trading volume of 3 million shares.

Here's what analysts said about Ciena.

Jess Lubert, Wells Fargo Securities (Outperform; $18-$28 PT range)

Ciena experienced healthy trends in the converged packet optical and packet networking business lines, which more than offset ongoing declines in legacy transport demand. Software and service revenue was also better than expected. While Ciena's top-line results once again appeared to benefit from strength in North America, with AT&T representing 21.6% of sales, the International business also experienced healthy growth, which we think is likely to continue into FY2015.

We believe the weaker-than-expected outlook likely reflects project delays at several North American carriers (AT&T, Comcast and Verizon) due to M&A activity and SDN/NFV initiatives that may impact spending over the next several quarters.

We continue to see value in Ciena shares as we believe the company remains well positioned to see ongoing 100G core upgrades, pending metro opportunities, and emerging web 2.0 builds drive another year of healthy growth and improved profitability in F2015. As a result, we believe weakness on Ciena's disappointing FQ4 outlook may present an attractive entry point in Ciena shares.

Stuart Jeffrey, Nomura Securities (Buy; $30 PT)

We expect the stock be pressured on the back of Ciena's weaker-than-expected

Q4 outlook. FQ3 results were better than expected, but Ciena is calling for FQ4 revenues of $570-610mn vs. consensus of $629mn and gross margin of high-30s/low-40% vs. consensus of 43.1%. Little color on the reasons behind the weak outlook was given in the release, but it implies that Ciena may not be immune to the carrier spending environment.

The weaker gross margin outlook is disappointing, as we viewed 40% gross margins as a level of support, especially given the recent gross margin execution. However, we suspect the weaker gross margin is more due to unfavorable product mix than on growing pricing pressure.

George Notter, Jefferies (Hold; $21 PT)

Ciena is guiding for $570-610 million in October sales (Street = $629 million) with non-GAAP gross margin in the high 30s to low 40s (Street = 43.1%). This will be a significant disappointment for investors. We suspect that both the top line and gross margin softness are - in large part - a by-product of AT&T's new Domain 2.0 strategy. Based on our checks in recent months, we know that vendors are experiencing significant price erosion through the Domain 2.0 process (we've heard about 40% pricing declines in some cases). Given the size of AT&T's business at Ciena (~21-22% of sales), this price erosion could certainly explain the company's margin guidance.

TheStreet Ratings team rates CIENA CORP as a Hold with a ratings score of C-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CIENA CORP (CIEN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth and compelling growth in net income. However, as a counter to these strengths, we find that we feel that the company's cash flow from its operations has been weak overall."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 3.4%. Since the same quarter one year prior, revenues rose by 10.3%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • CIENA CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, CIENA CORP continued to lose money by earning -$0.84 versus -$1.46 in the prior year. This year, the market expects an improvement in earnings ($0.95 versus -$0.84).
  • 44.91% is the gross profit margin for CIENA CORP which we consider to be strong. It has increased from the same quarter the previous year. Regardless of the strong results of the gross profit margin, the net profit margin of -1.81% is in-line with the industry average.
  • In its most recent trading session, CIEN has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Despite the fact that it has already risen in the past year, there is currently no conclusive evidence that warrants the purchase or sale of this stock.
  • Net operating cash flow has significantly decreased to $1.99 million or 95.56% when compared to the same quarter last year. In addition, when comparing to the industry average, the firm's growth rate is much lower.

--Written by Laurie Kulikowski in New York.

Follow @LKulikowski

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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