FBR's Scott Thompson thinks Ciena (CIEN +7%) will deliver a beat-and-raise FQ4 report on Dec. 12, and sees the telecom equipment vendor benefiting from carrier adoption of network architectures that feature "more intelligence and flexibility at the optical layer."
Thompson sees carriers building more advanced metro optical networks, replete with data centers that enable services such as content caching, app hosting, and advanced mobile messaging. He points to a recent optical switching deal between Verizon and Ciena as an example of how the latter benefits from this trend, and sees a similar deal with AT&T arriving soon.
At the same time, he cautions optical gross margins "could be under pressure," thanks to aggressive pricing from Infinera (INFN +2%), lengthy deployment times, and the adoption of software-defined networking controllers (CYNI is among the companies providing them) that remove some intelligence from the optical layer.
Ciena flew higher three months ago following its FQ3 report. The company reported solid demand for its integrated Ethernet switching/optical networking hardware, which now accounts for 56% of revenue.
Infinera is following Ciena higher, and so are Finisar (FNSR +5.2%), JDS Uniphase (JDSU +3.1%), Fabrinet (FN +1.8%), and AppliedMicro (AMCC +3.9%).
The list of enterprise hardware/software, telecom equipment, and component/chip suppliers selling off (previous) due to Cisco's poor guidance and order data now includes Oracle (ORCL -2.4%), EZchip (EZCH -6.1%), Riverbed (RVBD -6%, shot higher yesterday on M&A hopes), NeoPhotonics (NPTN -6.6%), Ixia (XXIA -4.7%), Oclaro (OCLR -4%), Procera (PKT -2.3%), and Alliance Fiber (AFOP -3.8%).
Cisco's weak service provider (-13% Y/Y) and emerging markets (-12%) orders are worrying investors in peers/suppliers, particularly given some peers (I, II) have also reported of soft carrier and/or EM demand. John Chambers' admission the NSA spying scandal has affected sales in China (orders -18%) also isn't going over well.
However, many on the sell-side argue a big portion of Cisco's problems are tied to company-specific product issues.
H-P (HPQ -5.6%), which has plenty of Chinese exposure, has added considerably to yesterday's AH losses, and so have Ciena (CIEN -5.3%) and Finisar (FNSR -10%). H-P's FQ4 report is due on Nov. 26, and Ciena's FQ4 report arrives on Dec. 12.
Cisco's (CSCO) dispiriting Jan. quarter guidance and Oct. quarter order data has produced an AH selloff in enterprise IT and telecom equipment names, as well as a couple of the companies supplying them. NetApp's below-consensus guidance might not be helping either.
Cisco's slumping FQ1 service provider (-13% Y/Y) and emerging markets (-12%) orders are bound to fuel concerns about carrier capex and macro trends. At the same time, it's worth noting Juniper and Alcatel-Lucent have been seeing better router sales to carriers (though not to Asia), and that Huawei has been doing better in emerging markets.
The rest of Cisco's order data for major regions and customer groups was relatively better, but not exactly encouraging. Americas orders -2%, EMEA -4%, Asia-Pac (hurt by emerging markets weakness) -9%. Enterprise orders +2%, commercial (SMBs) +1%, public sector -1%.
Switch sales (31% of revenue) rose 3% Y/Y, while routers (17% of revenue) fell 1%. Collaboration rose 1%, and service provider video fell 14% due to set-top weakness. Cisco's ASR 9000 edge router line, which EZchip (EZCH) supplies network processors for, grew 20% in FQ1 vs. 43% in FQ4.
Data center (UCS servers) had another strong quarter, growing 44%, but still only accounts for 5% of revenue. Wireless (dominated by Wi-Fi gear) grew only 8% after growing 32% in FQ4 (could be a negative for ARUN and RKUS).
John Chambers was asked on the CC (transcript) if the NSA spying uproar was affecting Cisco. He admitted it's a problem in China, but denied it was a major issue elsewhere.
Several telecom equipment vendors and component suppliers are selling off in sympathy with Calix (CALX -22.7%) and Cyan (CYNI -31.8%), each of which is crashing due to the poor Q4 guidance (I, II) provided with its Q3 results. Both companies are heavily dependent on U.S. telco spending.
Calix blamed its guidance on soft demand from tier-2 and tier-3 carriers, while Cyan blamed "cautious order patterns" caused by macro issues. On its CC (transcript), the company noted orders from top customer Windstream will be "substantially down compared to prior quarters."
Notable decliners include Finisar (FNSR -7.3%), JDS Uniphase (JDSU -3%), Ruckus (RKUS -6.6%), Applied Micro (AMCC -3.8%), Procera (PKT -4.1%), Allot (ALLT -3.8%), Ciena (CIEN -2.7%), and Alliance Fiber (AFOP -7.7%). JDS and Ruckus report after the bell; Allot and Procera rallied yesterday in response to the former's Q3 report.
Several industry names sold off last Thursday due to Infinera's soft Q4 guidance. Infinera said at the time it doesn't "expect significant budget flush or year-end money" from carriers.
Though its Q3 results beat estimates, Infinera (INFN -9.4%) guided on its CC (transcript) for Q4 revenue of $130M-$140M and EPS of breakeven to -$0.04, below a consensus of $141.1M and $0.03. Gross margin is expected to fall back to ~40% after rising to 49% in Q3 (+1000 bps Q/Q and Y/Y).
While Infinera expects to benefit from "a number of significant new wins and deployments" in Q4, the company doesn't "expect significant budget flush or year-end money" from carriers.
Moreover, while Infinera has won a number of new deals - five new purchase commitments were scored for its DTN-X optical transmission platform - deal timing "remains challenging because of [Infinera's] short lead times and the strategic nature of many of these customer decisions."
The soft Q4 top-line guidance provided with Juniper's (JNPR -5.9%) Q3 beat has led shares to fall below $20. Several peers are also off on a down day for tech: FFIV -4.3% (reporting after the close). DRWI -3.9%. PKT -2.8%. RKUS -2.6%. CIEN -2.4%. RVBD -2.2%.
On its CC, Juniper attributed its guidance to U.S. federal weakness caused in part by the government shutdown, and called the macro environment "dynamic." The company also disclosed it's cutting another 280 jobs (~3% of its workforce) in Q4, and that it's in the "later stages" of its search for a replacement for departing CEO Kevin Johnson.
Some of the job cuts are related to Juniper's decision to kill off its MobileNext 3G/4G infrastructure software line.
The sell-side is nervous about declining enterprise sales, caused in large part by security share losses. Juniper promises a resumption of security growth in 2014; favorable comps should make that easier.
Carrier routers continue to be a bright spot: MX series edge router sales rose 15% Q/Q, and core router sales 11% Q/Q. Both Cisco and Juniper have been seeing strong edge router demand in recent quarters.
Juniper also states it's seeing healthy carrier demand in all three major geographies. However, Americas demand is generally stronger than EMEA and Asia-Pac demand.
Adtran (ADTN -13.3%) guides on its Q3 CC for Q4 revenue to drop by a high single-digit to low-teen percentage Q/Q; that's worse than a consensus for a 7% decline.
Shares have nosedived on the guidance after trading higher earlier today in response to the telecom equipment vendor's Q3 beat.
Several other telecom equipment firms are also seeing sizable declines on a down day for tech, as are some component/chip suppliers. CIEN -4.3%. JDSU -3.9%. FNSR -4.5%. JNPR -2.8%. AMCC -3.8%. DRWI -4.7%. RVBD -3.3%.
Equipment vendors Adtran (ADTN +10.1%), Ruckus (RKUS +4.5%), Aruba (ARUN +2.5%), Ericsson (ERIC +2.2%), Procera (PKT +2.1%) and Calix (CALX +2.3%), and component/chip suppliers Oplink (OPLK +4.1%), NeoPhotonics (NPTN +2.3%), Alliance Fiber (AFOP +3.1%), AppliedMicro (AMCC +5%), and PMC-Sierra (PMCS +1.9%) have joined the ranks of names outperforming following Ciena's (CIEN +13.6%) strong numbers (fueled by strong demand for metro/edge networking hardware) and Juniper's upbeat conference comments about Q3 bookings and router demand.
Ciena mentioned on its FQ3 CC U.S. orders were relatively strong (likely a sign of strong AT&T/Verizon spending), as North American carriers lead the way in adopting newer technology platforms (100G optical, integrated Ethernet/optical hardware, etc.), However, the company also claimed Europe is stabilizing, and that it's seeing new customer wins in Latin America/Asia.
Ciena also touted its share gains, noting Heavy Reading calls it the leader in the fiber-based Ethernet access switch space, and that Dell'Oro ranks its first in the integrated Ethernet/optical market. However, it does look as if Ciena has lost some share in optical transport (revenue +15% Q/Q but -26% Y/Y). The company says new customer wins will lead transport growth to pick up.
Ciena (CIEN) expects FQ4 revenue of $550M-$580M, mostly above a $551.4M consensus.
Sales of integrated Ethernet switching/optical networking gear (Converged Packet Optical) rose 3% Q/Q and 23% Y/Y in FQ3, and made up 56% of revenue. That could be a positive for Cyan (CYNI - previous).
Ethernet switch sales (packet networking) +14% Q/Q and +104% Y/Y, and now 11% of revenue. Optical transport hardware +15% Q/Q but -26% Y/Y, and 12% of revenue. Software/services +7% Q/Q and +1% Y/Y, and 20% of revenue.
As Cisco and Juniper can vouch, demand for metro/edge networking hardware (such as Ciena's converged packet optical gear and Ethernet switches) has been strong lately.
Gross margin was 43.6%, +110 bps Q/Q and +400 bps Y/Y, and reversing FQ2's Q/Q decline. It's expected to be in the low-40s in FQ4. Opex -3.5% Q/Q and only +8% Y/Y, op. margin jumped to 8.2% from 3.7% in FQ2.
International customers made up 37% of revenue vs. 43% in FQ2. Two customers (possibly AT&T/Verizon) accounted for 31.8% of revenue, nearly even with FQ2.
Infinera (INFN) +6.9%, JDS Uniphase (JDSU) +2.5% and Finisar (FNSR) +2.8% in sympathy.
Deal optimism is overshadowing a bearish note from Raymond James: the firm has cut estimates through 2015, and (backing up a recent WSJ column) says checks indicate sell-through has been weak.
Meanwhile, several smaller networking/telecom equipment makers have joined Alcatel-Lucent and Ericsson (previous) in outperforming, as investors speculate Nokia will use some of its Microsoft cash to strengthen NSN via M&A. Infinera (INFN +5.6%), Ciena (CIEN +3.5%), DragonWave (DRWI +4.8%), and Ruckus (RKUS +2.6%) are among the winners.
Craig-Hallum thinks Nokia is now likely to buy Ruckus, a leading player in carrier Wi-Fi and an existing NSN partner.
Nasdaq-100 futures (QQQ, XLK) -0.5% AH after Cisco provides relatively light FQ1 guidance to go with an FQ4 beat, and also reports Asia-Pac/Japan orders were down 3% Y/Y (macro is blamed).
Networking/telecom hardware vendors and some of their suppliers are naturally the biggest decliners. Many of them have run up strongly this year on hopes of gradually improving carrier capex and enterprise IT spending. ALU -3.3% AH. JNPR -2.4%. ARUN -1.4%. FFIV -2%. ARRS -2.4%. RVBD -3.2%. JDSU -1.6%. FNSR -2.8%. CIEN -2.2%. CAVM -2%.