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Optical/IP

Ciena Still Having Some MEN Issues

Ciena Corp. (NYSE: CIEN) reported fiscal first-quarter results slightly ahead of Wall Street's expectations early Monday, but the company warned that its numbers are still bobbing up and down (or "slightly lumpy" as some would call it) because of lingering integration issues following the March 2010 acquisition of Nortel Networks Ltd. 's Metro Ethernet networks (MEN) division. (See Ciena Reports Fiscal Q1 , Ciena/Nortel Product Plans Revealed and Ciena Beats NSN to Buy Nortel's MEN.)

The company reported revenues for the three months ending Jan 31. 2011 of $433.3 million, slightly higher than the $421.9 million analysts had (on average) expected. Ciena's adjusted net loss (after one-time charges) was $13.3 million, or 14 cents per share, slightly better than the 16-cents-per-share loss anticipated by the financial analyst community.

The vendor had two major customers in the quarter that together generated 25 percent of total sales, or just more than $108 million. Ciena doesn't name those customers, but they are known to be AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ)

The company isn't reliant on the U.S. market, though, as 49 percent of its first-quarter revenues -- $212.3 million -- came from customers outside the U.S.

However, Ciena noted that it is "mindful of the effects of our back office integration activity" in the short term, which "resulted in some revenue acceleration into the first quarter and minor ERP-related supply chain constraints at the beginning of our second quarter."

As a result, Ciena is expecting its fiscal second-quarter revenues to be between $415 million and $435 million, lower than the $438.5 million expected by analysts, while margins are expected to be around the same as the first quarter's.

That forecast sent Ciena's share price down by $1.66, nearly 5.8 percent, to $27.15 in pre-market trading early Monday.

Why this matters
It's the OFC/NFOEC show in Los Angeles this week, so there's even more focus on optical market developments than normal this week. And as Ciena is one of the telecom sector's key optical system vendors, its latest financial performance will be a big talking point at the Los Angeles Convention Center and throughout the telecom sector in general.

As of the time this article was written, the vendor had yet to host its investor conference call to discuss its numbers, but Ciena's press release suggests that CEO Gary Smith will be looking to soothe investor concerns with talk of industry momentum, and explain that the second-quarter forecast is not representative of the vendor's current trading performance.

And there will certainly be those who will support his view. Ciena is well placed in the optical transport market's key sectors, with 40Gbit/s DWDM sales likely to be strong in 2011, and likely to retain key customers, such as the U.S. Tier 1 operators, as it has the products and know-how to meet the needs of the early 100 Gbit/s adopters. (See 100G Decision Time Looms.)

Analysts such as Mike Genovese at MKM Partners and Catharine Trebnick at Avian Securities LLC believe Ciena is well positioned to capitalize on the anticipated global increase in spending on transport infrastructure in 2011, and a short-term business software integration issue is unlikely to affect those market dynamics.

Ciena, though, still has to prove it can capitalize on its opportunities, with 2011 being key to showing whether the purchase of Nortel's MEN division was a wise move or an acquisition too far for CEO Gary Smith and his team.

For more
For more on Ciena's recent developments, see:

— Ray Le Maistre, International Managing Editor, Light Reading

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