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Benefit from Higher Telecom Spending with This Telecom Player

May 29, 2014 | About:
jaggom

jaggom

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Communications-equipment maker Ciena (CIEN) posted fantastic results recently. The stock performed well, posting growth in the revenue that topped the Street’s top line estimates. Though the company’s revenue was strong, still it posted earnings that failed to meet the Street’s estimates. However, the stock spiked 4% after Ciena came up with an upbeat outlook.

Let’s take a look at the quarter that went by and how the company might perform going forward.

Quarterly Overview

Ciena’s revenue fell 4% to $417 million in the quarter from last year. The weakness in revenue can be attributed to the fact that there was seasonal weakness and delay in revenue recognition from customers.

Though Ciena’s revenue fell in the quarter, the good thing is that the company managed to narrow its losses by checking its expenses. Ciena’s operating expenses declined a good 18% from last year, which helped it cut down its losses by 40%. Also, Ciena generated positive cash flows from operations that came in at $12 million, which were negative a year ago.

Prospects

Despite posting mixed results, Ciena is confident of a better performance in the future as a strong outlook indicates. The company is stretching its wings into newer ventures and diversifying its business by adding more clients to its list. Ciena is doing well on the international front in areas such as Asia Pacific, Latin America and parts of Europe.

In addition, Ciena is seeing a boom in mobile data usage as LTE and 4G services are gathering momentum. Ciena is looking to benefit from this roll out as some big names such as AT&T and Verizon are Ciena’s clients. Later this year, it will probably help Ciena generate more revenue as the roll out ramps up. The implementation of these services will push up demand for networking equipment such as optical switches that Ciena supplies.

The company recorded design wins at several Tier 1 telecom customers across the globe, including Europe, Brazil and India. Management believes that its customers are shifting to a new networking architecture and this will be a multi-year upgrade cycle.

Ciena has also diversified its product lines. Aside from being a leader in Ethernet solutions and packet optical networking, Ciena is witnessing growth in network application software. Ciena is looking to make the most out of growth in "mobile data, business services and app-driven machine-to-machine connectivity." This is why it is focusing on addressing the needs of the evolving network architecture and diversifying its portfolio to cater to different types of applications.

The company expects revenue from multiple international Tier 1 customers during the ongoing quarter. But at the same time, gross margin is expected to decline to the low-40s range from 43.6% in the previous quarter.

Management sees this drop as a short-term phenomenon as Ciena is aggressively looking to capture more international customers. Start-up costs and discounts offered to new customers were cited as the reasons for the pressure, but Ciena expects the metric to return to normal levels in the long run.

Moreover, networking giant Cisco, which trumped Mr. Market's expectations last month, expects weakness in this segment in the coming months. This forecast by Cisco lends more credence to Ciena’s revenue expectations of $435 million to $460 million in the current quarter. This is slightly below analysts’ estimates of $450 million at the midpoint.

Conclusion

Ciena has been working to keep its bottom line competitive and has also checked its costs. With the possibilities that lie ahead of Ciena, it is a good pick as of now.


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