Seeking Alpha
Long/short equity, special situations, value
Profile| Send Message|
( followers)  

Shares of Ciena Corporation (NYSE:CIEN), fell almost 20% in Thursday's trading session. The provider of communication networking equipment, software and services for voice, video and data traffic services reported disappointing third quarter results before the market open.

Third Quarter Results

Ciena reported third-quarter revenues of $474.1 million, up 8.9% on the year. Revenues came in line with the company's own forecast of $455-$485 million.

Ciena reported non-GAAP operating losses of $4.1 million, or $0.04 per share in the third quarter. This compares to non-GAAP profits of $8.3 million, or $0.08 per share in the third quarter last year. On average, analysts expected the company to lose $0.02 per share. Gross operating margins fell 440 basis points to 39.5% as a result of an unfavorable product mix.

Net losses came in at $29.8 million, or $0.30 per diluted share. This compares to a loss of $0.33 per share, last year. Ciena experienced a slow quarter as bookings were weak amidst a European slowdown, and a pause in orders caused by the Olympics.

CEO Gary Smith commented on the results, "We continue to win in the market and take share as demonstrated by a solid operating performance in the third quarter. We are experiencing the effects of ongoing macroeconomic challenges and slower than expected roll-outs of new design wins."

Outlook

For the current fourth quarter, Ciena expects revenues of $455-$480 million. On average, analysts expected Ciena to guide for fourth-quarter revenues of $499.5 million.

Non-GAAP gross margins are expected to come in around 40%. The company expects non-GAAP operating expenses of around $180 million.

The fourth-quarter guidance implies annual revenues of $1.82-$1.85 billion.

Valuation

Ciena ended its third quarter with $667 million in cash, equivalents and short-term investments. The company operates with $1.44 billion in short- and long-term convertible notes payable. The company operates with a net debt position of almost $800 million, if notes are not converted into shares.

For the full year of 2012, Ciena expects to generate revenues between $1.82 billion and $1.85 billion. The company is expected to lose more than $200 million, over $2.00 per share.

Valued at $1.3 billion, Ciena trades at merely 0.7 times annual revenues. The valuation compares to a revenue multiple of 2.2 times for Juniper Networks (NYSE:JNPR) and 2.2 times for Cisco Systems (NASDAQ:CSCO). These competitors trade at 37 and 13 times trailing annual earnings, respectively.

Investment Thesis

Year to date, shares of Ciena still trade with gains of 10% despite today's losses. Shares started the year around $12 per share, and have moved within a wide trading range of $12-$18 per share.

Over the past five years, shares of Ciena have lost roughly two thirds of their value. Revenues doubled from $902 million in 2008 to an expected $1.82-$1.85 billion in 2012. The company made a small profit of $39 million in 2008, but reported losses ever since. For the whole year of 2012, losses are expected to surpass the $200-million mark.

Manufacturers of equipment for networks and communication devices have seen a tough number of years. Intense competition and low demand has resulted in a weak operational performance at companies like Ciena, Juniper Networks and Alcatel. Share prices have suffered as well in the meantime.

Despite low traditional valuation multiples, I am not considering an investment in Ciena. The industry, including Ciena has structural profitability issues, which overshadow the lower valuation.

Source: Ciena Corporation: Sell-Off Warranted After Weak Guidance And Long-Term Structural Profitability Issues