Ciena Corporation - Two Consecutive Earnings Beats Send Shares 50% Higher For The Year

| About: Ciena Corporation (CIEN)

Shares of Ciena Corporation (NASDAQ:CIEN) jumped upwards on Wednesday's trading session after a second consecutive earnings beat as revenue growth is accelerating while Ciena is rapidly approaching break-even levels.

I continue to see good momentum going forwards and would not be surprised if shares could touch upon $30 in the coming six months.

Third Quarter Results

Ciena generated third quarter revenues of $538.4 million, up 13.6% on the year before. Analysts were looking for third quarter revenues of $533.5 million.

GAAP net losses narrowed from $29.8 million last year to a loss of $1.2 million over the past quarter, as losses per share improved from $0.30 last year to a loss of just a penny.

Non-GAAP earnings came in at $0.23 per share, comfortably beating consensus estimates of $0.16 per share.

CEO Gary Smith commented on the developments in the past quarter, "Differentiated by our specialist strategy, we have increased our market share, achieved steady growth, and delivered improved and more consistent financial performance over the last several quarters. We believe that by expanding our role in the industry and extending our reach within our markets, we will be positioned to deliver greater profitability that is more sustainable over time."

Looking Into The Results

Besides showing solid growth on a yearly basis, Ciena has seen its revenues increase a full six percent points compared to the second quarter.

The small packet networking business generated revenues of $61.6 million, more than double the amount of last year. The largest converged packet optical business reported a 22% growth as revenues totaled $302 million. Revenues from optical transport business fell 26% to $66.2 million.

Gross margins improved 420 basis points on the year before, totaling 42.4%. Margins were up 110 basis points compared to the second quarter. Operating expenses rose by 8.5% on the year before in actual dollar amounts, but actually fell 3% on the quarter before, resulting in solid operating leverage.

Consequently, operating margins came in at 2.8% of total revenues. This compares to losses of 3.2% in the comparable period last year.

A Guidance For The Third Quarter

Ciena expects fourth quarter revenues to come in between $550 and $580 million. Non-GAAP gross margins are seen in the low 40 percent grate, while non-GAAP operating expenses are seen in the high $190s million.

At the midpoint of the guidance, revenues are seen up 5.0% compared to the third quarter, and up 21.4% compared to last year.

Analysts were looking for fourth quarter revenues of $551.4 million.


Ciena ended its third quarter with $493.2 million in cash and equivalents. The company operates with $1.21 billion in long term convertible notes.

For the first nine months of the year, Ciena generated revenues of $1.50 billion, up 9.6% on the year before. Net losses narrowed from $105.2 million to $75.6 million. Base on the guidance, full year revenues are seen just north of $2 billion, while Ciena will report a sizable full year loss.

Factoring in gains of 13% in Wednesday's trading session, with shares exchanging hands at $23.50 per share, the market values Ciena at $2.4 billion. This values operating assets of the firm at roughly 2.3 times annual revenues.

Ciena does not pay a dividend at the moment.

Some Historical Perspective

Despite this year's strength, shares of Ciena remain in a long term downtrend. Shares spiked at an incredible $1,000 per share in 2000, levels which shareholders most likely will never see again.

Shares traded as low as $5 in 2009 and recovered to highs in their high twenties in spring of 2011. From that moment in time, shares have fallen roughly in half. Starting the year of 2013 around $15, shareholders have seen decent year to date returns of some 50%.

Between the fiscal year of 2009 and 2013, Ciena has seen enormous revenue growth. Revenues more than tripled from $652 million to an expected $2.05 billion this year. After reporting a $581 million loss in 2009, the company has continued to narrow losses, although the firm will still report a full year loss in 2013.

Solid Fundamental Improvements

CEO Smith remains optimistic on the company's prospects. He does not necessarily see an increase in spending by telecom carriers, instead he sees a shift in what carriers are spending their budgets on.

Yet large carriers, which are Ciena's largest customers, have showed plans to boost capital spending. AT&T (NYSE:T) and Verizon Communications (NYSE:VZ) have announced plans to boost capital spending to upgrade and increase performance of their networks in the coming year. The concentration is a risk, as the two largest customers of the firm generate roughly 32% of total revenues.

Back in June of this year, I last took a look at Ciena's prospects. I concluded the firm was well positioned to grow future revenues as short term profitability remained an issue.

The company has been really early to turn around the business in preparation for a fundamental shift in the network architecture business, resulting in revenues which have tripled since 2009. As losses narrowed to just a penny per share, the company is poised report earnings in the near future.

Ciena's clients are really enthusiastic about Ciena's 100G optics solutions which allow wireless communication at great speed and ease. The company remains well positioned as revenue growth is accelerating while the backlog keeps increasing, which adds to future visibility.

The company's target to report gross margins in their mid-forties in the medium term was almost already attained this quarter. The improved and continued diversification should make the business more resilient as well, both in terms of geographical and individual carrier exposure. On top of that, the converged architectural wins make sure Ciena's wins greater deals and ties customers more closely to the firm.

Investment Thesis

Shares of Ciena jumped from $15 towards $20 following their second quarter results, and now see a renewed jump to $23.50 per share on the back of the third quarter results. The valuation at 1 times annual revenues seems fair, yet it is the profit improvements going forward which have to support the next step in the shares recovery.

For now Ciena has full momentum going forwards as revenue growth is accelerating, while demand continues to add to the backlog. The profit improvements are important as well. While Ciena has sufficient liquidity after year's of losses, the interesting technologies and strong growth might attract competing firms to make an offer for the company.

Yet be aware that changes go quick. While Ciena has a leading position by evolving its organization, the market's demands and shift in infrastructure and architectural networks require the company to remain focused and embrace change. Yet the pace of focusing on the convergence of packet optical and specializing has given the company a large head start compared to large legacy players, providing a solid competitive position for the coming years.

As adjusted operating margins are expected to improve from a current 8% towards 10-12% in the medium term, the future bodes will with solid revenue growth.

Yet please consider the impact of the solid performance on the recent share price performance and analyze prospects for yourself. As a cautionary tone, CEO Smith urged analysts that they had to be careful to view Ciena through the same optical prism as they did in the early 2000s.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.