Ciena Corp. was the darling of Wall Street Thursday as its share price shot up by 17.4 percent to $19.15 following its fiscal second-quarter earnings report.
The excitement was caused by the vendor's sales, which were better than expected during the three months ending April 30 at $507.7 million, an improvement of 6.3 percent compared with a year earlier and more than 12 percent better than in the previous quarter.
And this isn't a one-off, it seems. Ciena also exceeded expectations with its outlook for its fiscal third quarter, including anticipated revenues in the range of $515 million to $545 million, with CEO Gary Smith noting on Thursday's earnings conference call that the company is now deploying 100Gbit/s systems in Tier 1 customers globally and that Ciena sees "a strong uptick" in 100Gbit/s sales. "We expect to see that continue," he added.
These numbers and sentiments are more than welcome, of course, as they suggest an upturn for the company and possibly even the telecom equipment sector as a whole. (Other telecom sector vendors saw their shares rise today following Ciena's report.)
But despite its encouraging top line numbers, Ciena was still in the red. It reported a net loss of $27.1 million in the fiscal second quarter and even after one-time costs are excluded from the calculations, it still only managed a tiny adjusted (non-GAAP) profit of $2.2 million.
In addition, it isn't expecting its margins to improve any time soon: Its adjusted gross margin in the fiscal second quarter was 42.5 percent and is set to be "in the low 40s percent range" during the third quarter.
So while investors are chasing the stock, Raymond James Financial Inc. analyst Simon Leopold remains cautious. "The rally in the shares today [is] understandable following a beat and raise quarter and an upbeat conference call … [but] we continue to see margins as challenged and worry about some unrealistic expectations."
For Leopold it's a case of wait-and-see. "Trends favor Ciena, but leverage is not evident: Ciena certainly took share and continues to do so in its markets and we're encouraged by revenue trends," but Leopold and his team are loathe to get too excited "because of a lack of margin and earnings leverage."
So why are margins flat? Leopold notes that Ciena is strong in the 100Gbit/s equipment and carrier Ethernet markets but he believes there is "evidence of 100G price competition and maybe discounts for larger Ethernet projects."
— Ray Le Maistre, Editor-in-Chief, Light Reading