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Optical/IP

Ciena lags Q4 estimates as orders slow

Ciena's share price took a bit of a tumble after the optical giant reported lower net income than expected for the fiscal fourth quarter of 2020.

According to Marketwatch, the company's share price fell 7% in premarket trading on Thursday. Ciena reported net income of $65 million or 42 cents per share, which was down from $80.3 million or 51 cents per share compared to the corresponding period of the previous year.

On an adjusted basis, Ciena reported earnings per share of 60 cents, up from 58 cents in the previous year. Revenue fell to $828.5 million from $968 million in the year-earlier period. Marketwatch said analysts surveyed by FactSet were expecting 63 cents in adjusted earnings per share and $825.3 million in revenue.

Zacks Equity Research also said that Ciena's revenue and earnings per share for the fourth quarter missed its consensus estimates by -6.25% and 0.02% respectively.

Meanwhile, Briley Securities commented that the results brought no major surprises, and noted that demand is expected to remain soft in the coming two quarters.

"Management indicated orders have materially slowed down, as service providers have become risk averse due to COVID-related issues," said Dave Kang, an analyst at Briley Securities, in a research note. "This has resulted in networks running hotter. In addition, they noted the pandemic has shifted traffic patterns to access/edge."

Ciena has already warned that service providers are slowing down spending on their network due to the pandemic and that the situation won't improve for several more quarters.

Continuing uncertainty because of COVID-19

Kang also pointed out that Ciena expects demand to improve in the second half of the next financial year, "and as such, that the 2021 fiscal year is expected to be back-end loaded."

Ciena's outlook for the first quarter of 2021 is for revenue of $735 million to $765 million, which Kang said is below consensus estimates of $759 million to $762 million.

Gary Smith, president and CEO of Ciena, conceded that "current market conditions" are expected to persist in the near-term, although he expressed confidence in "strong secular demand dynamics and our ability to continue to outperform the market."

In a transcript of Ciena's earnings call, CFO James Moylan said Ciena is not in a position to provide three-year financial targets at this time "given the uncertainty stemming from the pandemic."

"However, our long-term financial goals remain unchanged. We plan to deliver additional operating leverage while growing faster than the market," he said. "With that context and set of assumptions, we expect to grow our annual revenue at or slightly faster than the market in a range of 0% to 3% with a stronger than typical second half as conditions improve. We expect continued strong adjusted gross margin in fiscal '21 for the full year."

For fiscal year 2020, Ciena reported revenue of $3.53 billion, as compared to $3.57 billion for fiscal year 2019. Adjusted net income was $460.1 million, compared to $331.8 million for fiscal year 2019.

Webscalers and pluggables

In the fiscal second quarter, Ciena had reported that 42% of the company's total revenue came from "non-telcos." The direct sales to webscale providers were about 24% of its total quarterly revenue.

However, Briley Securities' Kang noted that sales to webscale customers fell 27% quarter on quarter in the fourth quarter, and represented 21.6% of sales.

According to the transcript, Smith said Ciena thinks the webscale market in 2021 will grow in the mid-single digits, "and we expect to maintain market share, 50% plus, and grow basically in line with the market this year."


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Although Ciena also expressed confidence that it would be "ready to intercept the opportunity for pluggables when market adoption begins sometime in the second half of 2021," Kang said it believes "these pluggables could be more of a threat than an opportunity."

"Our checks indicate some of its webscale customers are working to develop their own networking products by sourcing pluggables from various vendors such as Acacia even though they could be for simpler shorter reach applications. Nevertheless, it appears that the component and system vendors are converging to pluggables, and it remains to be seen how this tenuous situation will be played out over the next two to three years," Kang observed.

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— Anne Morris, contributing editor, special to Light Reading

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