Ciena Snaps Up Automation Expert Packet Design, Suffers Margins Glitch

Optical and packet transport systems specialist Ciena ends May on a mixed note with news of an interesting strategic acquisition (positive), year-on-year revenues growth (positive) but worse than expected profit margins (negative, obvs!).

First, the M&A move. To enhance its Blue Planet network management system -- which came on board as part of the 2015 acquisition of Cyan -- Ciena Corp. (NYSE: CIEN) is set to acquire IP network optimization and analytics specialist Packet Design for an undisclosed sum. This move, according to Ciena, will extend the automated network optimization capabilities of the Blue Planet system beyond Layers 0-2 and into Layer 3. (See Ciena Absorbs Cyan for New IP Onslaught and Is There Life on Ciena's Blue Planet?)

Packet Design, which prides itself on enabling "self-driving network" operations based on real-time telemetry and analytics, has raised more than $50 million since its inception in 2000, according to Crunchbase, with its most recent capital top-up being a $14 million round in 2013, when the company was effectively acquired by Austin, Texas-based private equity firm Lone Rock Technology Group.

Second, Ciena reported fiscal second quarter revenues, for the period ended April 30, of $730 million, up by 3% year-on-year and slightly higher than Wall Street's expectations. However, its adjusted operating margin came in at 7.7%, compared with 12.5% a year ago, gross margin was down to 40.7% from 45.7%, and net income dipped to $13.9 million from $38 million in the quarter a year ago.

CEO Gary Smith blamed the margin dips on the impact of "several new, international service provider deployments in their early stages," with business in India particularly relevant here, and noted that gross margins are expected to return to "normalized" levels (though a timescale for that recovery wasn't offered). India, the company noted, contributed $79 million in reveues during the quarter, more than 10% of the total. (See Ciena Bags Backbone Deal at India's RJio.)

Investors initially didn't like the news, as Ciena's share price dipped by as much as 8% in pre-market trading early Thursday, but recovered as the vendor's management team conducted its earnings call and calmed early nerves to record a slight gain of 1.3% in early trading to $24.37.

Smith was also bullish on the earnings call about recent customer gains and the company's market strength. He boasted that Ciena is the only transport systems vendor that is growing and profitable and that the company is signing up significant new customers at an impressive rate. "We won eight new Tier 1 carriers in the first half [of the fiscal year]… These are quality Tier 1 customers that will be with us for years," he noted, with some of those being in Europe, where Ciena has struggled in recent years. Smith added that Ciena has also landed additional business with the large Webscale players and even the "new, emerging Webscale companies."

— Ray Le Maistre, Editor-in-Chief, Light Reading

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