Ciena (CIEN) , a networking company, reports fourth-quarter results on Thursday. In the last one-year period, shares of Ciena are down 16%, as weak capital spending by Tier 1 telecom providers has pinched Ciena's growth.
I remain optimistic on shares of Ciena. The company has been taking market share in the metro optical space as well as the so-called "web scale" business. I also think Ciena will find plenty of opportunity in the transition from 4G to 5G cellular communications.
Years ago, Ciena would only take calls from the Tier 1 telecom big boys, like Verizon (VZ) and AT&T (T) , but the nature of the optical business changed. In 2000, Verizon was 40% of Ciena's revenue. As the Tier 1 firms finished building out their long-haul optical networks and completed the optical backhaul networks that capture traffic coming off their cell towers, Ciena's growth slowed.
Long-haul cables, or optical cables that stretch more than 1,500 kilometers, have been upgraded over the years to handle as much as 90 channels of 100 GB of data. These high-capacity cables connect to metro areas' 10-year-old networks that can only handle 10GB to 40 GB of traffic.
This situation is creating a traffic jam of epic proportions. Anyone who has tried to stream a movie only for it to get stuck buffering has been trapped in that traffic jam -- creating tremendous opportunity for Ciena.
The second big opportunity for Ciena is web scale. Large websites like Action Alerts PLUS holding Facebook (FB) and Amazon (AMZN) , as well as cloud service providers, need to jack directly into these metro area networks. Increasingly, these sites are building all-optical data centers to handle the enormous amount of traffic. Now, with web scale taking off, 30% to 40% of Ciena's revenue comes from non-telecom customers, including web scale, multiple system operators, enterprise and submarine networks.
Ciena reports fourth-quarter results on Thursday. Analysts expect earnings of 46 cents per share on revenue of $716.5 million. Gross margin is expected to be at 45%, with operating margin at 12.5%.
Historically, the first quarter is down sequentially due to seasonal demand, so I would expect some softness in first-quarter guidance. The first quarter of 2016 was down 17% and the first quarter of 2015 was down 11%.
Business should ramp up into the second half of 2017 as Ciena continues to take market share in metro area networks and web scale.
Some investors are concerned there is too much M&A dealmaking in communications companies and that will lead to a slowdown in equipment spending as companies try to squeeze out expenses. There are three major deals in the works: AT&T and Time Warner (TWX) , Verizon and XO Communications, and Century Link (CTL) and Level 3 (LVLT) . While Ciena claims it hasn't seen any slowdown in demand, these deals could turn out to be a headwind once they are completed. Investors will be listening carefully for any signs that demand could slow because of all these deals.
Next year, sales are expected to grow 8% to $2.8 billion. Earnings of $1.71 per share would be up 19.5% from the 2016 estimate of $1.43. Historically, Ciena trades between 16 and 18 times forward estimates. Assuming the consensus estimates are right, Ciena should be able to trade to the midpoint, or about $30 per share.