Ciena: Let's Split!

On the face of it, Ciena Corp. (NYSE: CIEN) more than delivered with its third quarter financials today, with revenues of $152.5 million and a massively reduced net loss of $4.3 million, or 1 cent per share. (See Ciena Reports Q3.)

The revenues are up more than 16 percent sequentially and by 38 percent compared with last year, while the net loss this time last year was $51 million.

And the numbers are better than analysts had predicted. On average, Wall Street had expected revenues of $143.7 million and an adjusted EPS (earnings per share) of 1 cent. Ciena's adjusted EPS -- calculated once a number of charges and credits, such as restructuring costs, stock compensation costs, and income tax adjustments are excluded -- was 2 cents per share, from adjusted net income of $13.6 million.

The quarter's gross margin was 47 percent, and the company says that number should settle in future quarters at around the mid-forties.

So when the numbers were released a few hours before the stock markets opened, and about 90 minutes before the vendor's conference call, Ciena's share price jumped $0.17, about 4 percent, to $4.48 in pre-market trading.

Fast forward to post-conference call early afternoon trading, and the stock has dipped more than 7 percent from yesterday's closing price to languish at $3.99, despite a stream of positive, bullish comments from CEO Gary Smith, who would, at length, tell anyone with a pulse how his company's product strategy matches the transforming needs of the world's telecom operators.

No wonder, then, that Ciena has decided to proceed with a one-for-seven reverse stock split on September 22 that, says Smith, will make the shares "appeal to more investors," particularly those that don't buy shares below a certain limit: Ciena's stock hasn't been above $10 since early 2002, when low-waisted denim was hip. (See Ciena Announces Stock Split.)

The catalyst for today's about turn appears to be the outlook for the current fourth quarter. Ciena predicts sequential growth of about 5 percent, which would take sales to just above $160 million, again higher than current analyst expectations of $156.5 million, though reflecting a slowdown in quarter-on-quarter growth.

The company is also still relying on a small number of customers for a large portion of revenues. It had three 10 percent-plus customers in the third quarter, which, together, generated nearly 52 percent of all revenues. All three are North American, so Ericsson AB (Nasdaq: ERIC)'s contribution as a reseller wasn't as significant as in the second quarter. (See Ericsson Gives Ciena a Boost.)

And the expected sequential rise in revenues from the company's flagship 4200 multiservice platform, as sales were about flat at $11.5 million, though CFO Joe Chinnici said shipments during the quarter were worth twice that amount, and are "ramping aggressively." Demand is "going crazy in Europe," he added. (See Ciena Shrinks Its Hot CN 4200.)

Analysts are also clearly worried about the threat of competitors, most notably those with lower prices, such as Huawei Technologies Co. Ltd. and Infinera Corp. (Nasdaq: INFN), and those with expanding muscle -- such as a merged Alcatel (NYSE: ALA; Paris: CGEP:PA) and Lucent Technologies Inc. (NYSE: LU) -- as Smith and his team were peppered with questions about these players. (See Ciena CEO: Watching Infinera.)

Direct comments about Infinera were avoided, but Huawei wasn't treated as cautiously. "Our value proposition is different -- we wouldn't compete on price with the Chinese guys," said Smith. "But we don't see them that much, as we don't play in the low cost market platforms they're selling. We see them from time to time in Europe, and they're included in RFPs as a strategic stalking horse by purchasing teams, but when we are against them we tend to win" because carriers want Ciena's features and value proposition, added the CEO.

As for the impending creation of Alcatel Lucent, Smith reckons there's an opportunity to win new business whether the merger goes ahead or not. (See Alcatel Lucent Merger Under Fire.)

"The consolidation is good for the industry, but it will be a challenging integration for them," stated Smith. "If they merge, that will cause a degree of confusion, and if they don't, that'll cause confusion too. Any confusion is good for us." Is that clear enough for y'all?

— Ray Le Maistre, International News Editor, Light Reading

digits 12/5/2012 | 3:42:31 AM
re: Ciena: Let's Split! Are mid-tier vendors with annual revenues of less than $1 billion, such as Ciena, vulnerable to competitive attrition by small specialists and the weight of the majors, or are they the optimum size -- small enough to be nimble in R&D and marketing but having financial scale?
alchemy 12/5/2012 | 3:42:29 AM
re: Ciena: Let's Split!
Ray Le Maistre inquires:
Are mid-tier vendors with annual revenues of less than $1 billion, such as Ciena, vulnerable to competitive attrition by small specialists and the weight of the majors, or are they the optimum size -- small enough to be nimble in R&D and marketing but having financial scale?

I don't think company size has anything to do with it. It's the quality of the management. Weak management will drive a company into the ground because they can't react to changing market conditions. Often, this happens when the corporate bean counter or lawyer takes the corner office replacing the original vision and strategy with short-term tactics. General Electric and 3M have always been nimble despite being giants. Countless small and mid-size companies have augered into the ground when market conditions changed. Regardless of the size of the company, before you invest in them, you have to ask yourself if you think the management team is good enough to react to opportunities created by changing market conditions? I think Ciena is one of them.
materialgirl 12/5/2012 | 3:42:25 AM
re: Ciena: Let's Split! I thought these boards thoroughly discussed the sacking of the development team behind the 4200. If the brains behind the box are gone, how can they generate demand? Don't customers know the box is likely to suffer from poor support and a non-existend upgrade path? In this scenario, flat revenues make sense. For ever.
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