Ciena Q2 Earnings Beat Ests, Revs Miss - Analyst Blog

Ciena Corp. ( CIEN ) reported mixed second-quarter 2014 results. The telecom equipment maker reported earnings of 6 cents per share (excluding share-based compensation and other one-time items) as against a loss of 7 cents reported in the year-ago quarter. Earnings managed to beat the Zacks Consensus Estimate of 3 cents.

Shares were up 18.4% ($3.49) following the second quarter earnings release.


Revenues jumped 10.3% year over year to $560.1 million, which lagged the Zacks Consensus Estimate of $562.0 million. Revenues also beat the mid-point of management's guided range of $540.0 to $570.0 million. Orders were up 7.0% on a year-over-year basis.

Product revenues (82.3% of revenues) rose 11.5% from the year-ago quarter to $460.8 million. Services revenues (17.7% of revenues) climbed 5.0% year over year to $99.2 million.

Converged Packet Optical revenues surged 63.7% year over year to $356.8 million. Packet Networking increased 11.9% from the year-ago quarter to $66.5 million. Optical Transport revenues increased 5.3% year over year to $29.6 million. Software and services revenues increased 19.1% from the year-ago quarter to $107.1 million.

United States contributed 58.0% of the revenues, while international customers contributed 42.0% in the last quarter. One customer represented 21.5% of the revenues. AT&T ( T ) and Verizon ( VZ ) were two of Ciena's top carrier customers.

Operating Results

Gross margin (Including share-based compensation) expanded 60 basis points (bps) on a year-over-year basis to 42.9% due to favorable customer and product mix.

Operating expense, as a percentage of revenues (including share-based compensation), declined 250 bps from the year-ago quarter to 43.6%. The year-over-year decline was primarily driven by lower research & development (down 140 bps), selling & marketing (down 20 bps) and general & administrative expenses (down 40 bps).

As a result of lower operating expenses, Ciena reported operating income (including share-based compensation) of $23.0 million compared with $8.8 million reported in the year-ago quarter.

Ciena reported net income of $7.4 million or 6 cents per share versus a loss of $7.6 million or 7 cents in the year-ago quarter.

Balance Sheet

At the end of the second quarter of 2014, cash and cash equivalents (including short-term and long-term investments) were $430.2 million compared with $440.1 million in the previous quarter. Cash flow from operations was $2.0 million in the quarter compared with outflow of $37.2 million in the prior quarter.


Ciena forecasts revenues in the range of $585.0 to $615.0 million for the third quarter of fiscal 2014. The Zacks Consensus Estimate is currently pegged at $592.0 million, slightly lower than the mid-point of the company's guidance range.

Adjusted gross margin (excluding one-time operating items) is projected to be at the lower to mid 40% range. Ciena expects adjusted operating expense of approximately $210.0 million for the third quarter.

Management expects order flow to increase from the second quarter and remain strong during 2014. Ciena continues to expect average operating expense of $205.0 million for fiscal 2014. The company expects to achieve the lower end of its operating margin target range of 7.0% to 10.0% for the fiscal year.

In the second half of 2014, the company is likely to introduce a new application software and an entirely new product platform targeting opportunities that will expand its addressable market in a way that makes strategic sense for both Ciena and its customers.

Our Take

Ciena provided a cautious second-quarter margin guidance, which may remain an overhang on the stock in the near term. Higher operating expenses continue to remain a concern.

Although Ciena expects to improve its operating leverage, we believe any decline in top-line growth particularly due to stiff competition from Cisco ( CSCO ) and Alcatel-Lucent S.A will negatively impact profitability, going forward.

Nevertheless, we believe increasing spending on optical upgrades and higher number of orders from international customers will boost top-line growth in fiscal 2014. Moreover, the company's Tier 1 contract wins and strong backlog are expected to boost near-term results.

Additionally, the diversification of customer base will be a major growth driver going forward. Further, the partnership with Ericsson is a significant positive that will drive international revenues in the long run.

Currently, Ciena has a Zacks Rank #3 (Hold).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

AT&T INC (T): Free Stock Analysis Report

CISCO SYSTEMS (CSCO): Free Stock Analysis Report

CIENA CORP (CIEN): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

To read this article on click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.