Ciena: Losses Widen Despite Earnings Beat

| About: Ciena Corporation (CIEN)

Telecommunications network specialist Ciena Corp. (NASDAQ:CIEN) reported third quarter fiscal 2010 loss of $16.7 million or 18 cents per share (including Nortel’s assets), which increased from a loss of $13.4 million or 15 cents in the year-ago quarter.

Earnings include stock based compensation charges but exclude one time items such as amortization of intangibles, fair value adjustment of acquired inventory, acquisition and integration as well as restructuring costs, loss on cost method investments and loss on fair value of embedded derivative on 4% convertible note.

Excluding stock based expenses, amortization of intangibles and one-time charges, adjusted loss per share of 9 cents was up from the year-ago quarter’s loss of 5 cents per share. However, the results were better than the Zacks Consensus Estimate of a loss of 44 cents.

This was the first full quarter to include the operations of Nortel Networks’ Metro Ethernet Networks (MEN) business, acquired on March 19, 2010. The quarter included $17.0 million in acquisition and integration-related expenses associated with the acquisition of the optical networking and carrier Ethernet assets of Nortel’s MEN business.


Total revenue of $389.7 million in the third quarter of 2010 was up 136.5% year over year from $164.8 million. Total revenue includes $221.8 million (56.9% of total revenue) from the acquired MEN assets of Nortel Networks as of March 19, 2010. Revenues were in line with management’s guided range of $375 million to $400 million and the Zacks Consensus Estimate of $386.0 million.

Revenues (including Nortel’s contribution) in the reported quarter includes $312.4 million in product revenues (80.2% of total revenue) and $77.3 million in services revenues (19.8% of total revenue).

Sales to international customers represented 41.0% of total revenue in the quarter versus just 29.0% in the previous quarter. This indicates that Ciena is gaining an increased international presence. The company had two 10.0% plus customers in the quarter, which together accounted for 34.0% of total sales.


Gross profit, excluding amortization of intangibles and fair value adjustment of acquired inventory but including stock-based compensation expenses, leaped 132.5% year over year to $175.2 million in the third quarter mainly due to increased revenues. Gross margin came in at 45.0% as compared with 45.7% in the year-ago quarter due to a lower revenue base in the year-ago period.

Total operating expenses upped 179.8% year over year to $301.5 million in the quarter due to higher research, development and marketing expenses. Operating expenses include stock based compensation expenses but exclude one time charges such as amortization of intangibles, acquisition and integration as well as restructuring costs. Adjusted operating margin came in at -2.7%, an improvement from -7.3% in the year-ago period.

Balance Sheet & Cash Flow

Both balance sheet and cash flow metric deteriorated from the previous quarter. Ciena exited the quarter with $470.0 million in cash and short-term investments, down from $614.0 million in the previous quarter.

The company used $130.0 million in cash from operations versus $68.7 million cash used in the previous quarter. This includes the effect of $17.0 million of cash spent on acquisition and integration-related costs and a $109.0 million increase in working capital.


Although the company enjoyed a recovery in customer activity and growing demand, it apprehends macroeconomic conditions to remain volatile. Ciena expects fourth quarter revenues to increase sequentially by 5% or approximately $409.0 million, below the Zacks Consensus Estimate of $424.0 million. Adjusted gross margin is projected to be in the low 40% range, consistent with the company’s near-term expectation.

The company did not provide any earnings per share guidance; however, the current Zacks Consensus Estimate for the fourth quarter is pegged at a loss of 21 cents, in sync with the year-ago period.

We anticipate a recovery based on the favorable operational execution, which will lead to a gradual improvement in results. However, near-term results are expected to remain under pressure due to increased expenses, volatile European market, a slowdown in carrier spending and continued losses.

Ciena currently has a Zacks #3 Rank (Hold) and a longer-term recommendation of Neutral.

Disclosure: None