The telecommunications network specialist Ciena Corp. (CIEN) is set to announce its fiscal fourth-quarter earnings on Dec 10.
Though market conditions have improved, Ciena expects continued lumpiness in results, as customers are still spending cautiously. As a result, the company guided fourth-quarter revenues to be flat sequentially.
Operating expenses on a non-GAAP basis for the fourth quarter are expected to be in the $80-$85 million range. The company expects higher prototype costs in the coming quarter. While pricing remains competitive, the company expects to sustain gross margins in the mid to high 40% range in the near term.
We expect the Nortel Network Corp.'s (NT) deal to be greatly beneficial for Ciena’s business. Ciena acquired the Notel’s optical networking and carrier Ethernet business for a total consideration of $769 million.
Ciena expects the deal to be significantly accretive to its operations in fiscal 2011. We believe that the deal has the potential to drive significant growth in Ciena’s rapidly expanding metro Ethernet business and optical networking products. The Nortel deal would be the largest ever for Ciena and would also help it expand geographically and improve cross-selling opportunities.
Also, the merger could double Ciena’s revenues. While the Nortel acquisition will enable revenue growth, integration risk is a major issue in our opinion. Ciena will incur integration-related costs in 2010, which will dilute its earnings.
Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2010 due to favorable operational execution and growth in data traffic.
We maintain our neutral rating on Ciena’s shares.