Ciena in Line, Guides Up

| About: Ciena Corporation (CIEN)
This article is now exclusive for PRO subscribers.

Telecommunications network specialist Ciena Corp.’s (NASDAQ:CIEN) fiscal 2010 second-quarter loss of 36 cents per share (including Nortel’s (OTC:NRTLQ) assets) narrowed from a loss of 38 cents in the year-ago quarter but was in line with the Zacks Consensus Estimate. The loss for the quarter includes stock-based compensation expenses but excludes amortization of intangibles and one-time charges.

The results include six-week results from the acquired assets of Nortel Networks’ Metro Ethernet Networks (MEN) business on March 19, 2010. The quarter included $39.2 million in acquisition and integration-related expenses associated with the acquisition of the optical networking and carrier Ethernet assets of Nortel’s MEN business.

Although the combined revenue for the quarter missed Wall Street expectations, the company’s third-quarter 2010 guidance, which is the first full quarter to include the operations of Nortel’s MEN business, is extremely good, beating Wall Street expectations.

Ciena expects third-quarter revenue to be in the range of $375 million to $400 million, ahead of the Wall Street target of $337 million. This is a 52.9% increase from the current quarter. Adjusted gross margin is expected to be in the low 40% range, consistent with the company’s near-term expectation.

The company cited a recovery in customer spending, however it expects the European economy to remain challenging due to volatile macroeconomic conditions.


Total revenue of $253.5 million in the second quarter of 2010 was up 75.6% year over year. This includes $53.5 million (21.1% of total revenue) from the acquired MEN assets of Nortel Networks on March 19, 2010.

Excluding the Nortel acquisition, revenue from Ciena’s pre-acquisition portfolio (on a stand-alone basis) was $200.0 million, a 14% increase from the sequential first quarter revenue of $175.9 million and a 39% increase from the year-ago period of $144.2 million in revenue. Revenue, excluding Nortel’s assets for the quarter, was above the company’s guidance of $185 million to $195 million.

Revenue (including Nortel contribution) for the quarter included $206.4 million in product revenue (84.1% of total revenue) and $47.1 million in services revenue (15.9% of total revenue). Sales to international customers represented 29% of total revenue in the quarter. The company had two 10.0% plus customers in the quarter at 42.0% of total sales.

Operating Performance

Ciena exited the quarter with $614 million in cash and short-term investments, down from $1 billion in the previous quarter.

The company used $68.7 million in cash from operations versus $4.5 million generated in the previous quarter. This includes the effect of $38 million of cash spent on acquisition and integration-related costs and a $36 million increase in working capital.

During the quarter, the company completed a private offering of 4.0% Convertible Senior Notes due March 15, 2015, in aggregate principal amount of $375.0 million. Long-term debt (convertible notes payable) increased to $1.17 billion from $798.0 million in the previous quarter.

Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2011 due to favorable operational execution and growth in data traffic. The Zacks Consensus estimate for fiscal 2011 is a profit of 19 cents per share.

Moreover, the Nortel deal will be significantly accretive to its operations in fiscal 2011, although it could bring in some integration risks near-term. The company said that the integration of a Nortel unit is heading as per the company’s plan.

We have a Neutral rating on the stock.