Zacks_Analysts' Blog : Ciena Beats, Guides Low - Analyst Blog

Telecommunications network specialist, Ciena Corp. (CIEN) reported first quarter fiscal 2011 revenues and earnings per share (EPS) above the Zacks Consensus Estimate. However, share price declined 9.8% to close at $25.98 due to lower-than-expected revenue forecast for the second quarter.

Earnings

Adjusted loss per share of 24 cents (including stock-based compensation expense but excluding one-time charges) was above the year-ago quarter’s loss of 21 cents per share. However, earnings per share were better than the Zacks Consensus Estimate of a loss of 30 cents.

Revenue

Total revenue of $433.3 million in the first quarter of 2011 was up 146.4% year over year from $175.9 million. Revenues increased 4.0% sequentially from $417.6 million. Revenues were above the Zacks Consensus Estimate of $421.0 million.

This was the third full quarter to include the operations of Nortel Networks’ Metro Ethernet Networks (MEN) business, acquired on March 19, 2010.

Revenues (including Nortel’s contribution) in the reported quarter include $352.4 million in product revenues (81.3% of the total revenue) and $80.9 million in services revenues (18.7% of the total revenue).

Sales to international customers represented 49.0% of the total revenue in the quarter versus 50.0% in the previous quarter. The company had two 10.0% plus customers in the quarter, which accounted for 25.0% of total sales.

Margins

Adjusted gross profit soared 121.9% year over year to $181.1 million in the first quarter mainly attributed to improved operating efficiencies. Gross margin came in at 41.8% compared with 46.4% in the year-ago quarter due to a lower revenue base in the year-ago period. Management believes continued focus on Tier 1 design wins and expanding footprint in the high-capacity transport will affect margins in the near term, offset by an improved overall product mix in 2011.

Total operating expenses increased 103.2% year over year to $182.1 million in the quarter credited to higher research, development and marketing expenses. Adjusted operating margin came in at -0.2%, an improvement from -4.5% in the year-ago period.

The quarter included $24.2 million in acquisition and integration-related expenses associated with the acquisition of the optical networking and carrier Ethernet assets of Nortel’s MEN business.

Balance Sheet & Cash Flow

Ciena exited the quarter with $625.8 million in cash and short-term investments, down from $688.7 million in the previous quarter. The company used $63.7 million in cash from operations versus $25.8 million cash used in the prior quarter.

Guidance

Ciena expects second quarter 2011 revenues to be in the range of $405.0 million to $435.0 million, below the Zacks Consensus Estimate of $439.0 million mainly due to higher costs related to the Nortel Networks acquisition.

The company noted that in the first quarter it recognized $10 million in revenue that it had intended to recognize in the second quarter. Ciena also made some changes to its back-office systems arising from its Nortel acquisition. As a result of a temporary supply chain issues that have passed into the second quarter, management anticipates revenue to be weak in the second quarter.

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 second quarter is pegged at a loss of 16 cents versus 21 cents in loss in the year-ago period.

Near-term results are expected to remain under pressure due to increased expenses, slowdown in carrier spending, intensifying competition from Cisco Systems (CSCO) and Alcatel Lucent (ALU), and continued losses.

Although the guidance for the second quarter remain weak, we anticipate a recovery based on the favorable operational execution and new product line up, which will lead to a gradual improvement in results in 2011.

We have a long-term Neutral recommendation on Ciena. Ciena currently has a Zacks #3 Rank, implying a short-term Hold rating.