Ciena: Earnings Preview; demand remains robust, but supply chain problems are creating a bottleneck (43.2 -1.07)
Ciena (CIEN) is set to report Q4 (Oct) results tomorrow before the open with a call to follow at 8:30am ET. Last quarter, Ciena reported results at 7am ET, so it's likely that's when the company will report this quarter. Of note, Ciena typically guides for revenue for the next quarter on the call.
The S&P CapitalIQ consensus for non-GAAP EPS is to fall 92% yr/yr to just $0.07 while revenue is expected to fall 18% yr/yr to $847.8 mln (current guidance: $800-880 mln, which was well below consensus at the time). Ciena has guided to Q4 adjusted gross margin of approx. 40%. Ciena has missed on EPS in each of the past two quarters.
Demand has not been the problem and strong secular demand trends show no signs of abating, driven by 5G, cloud and automation as well as higher infrastructure spending, residential broadband funding, and opportunities to displace Huawei. In fact, Ciena had nearly 60% yr/yr order growth in its last four quarters. In Q3 (Jul) specifically, orders outpaced revenue by more than 30% and its backlog is now well over $4 bln with further growth expected in Q4.
Ciena will eventually convert this large backlog to revenue, but supply chain challenges are the main impediment. Specifically in the second half of Q3, Ciena experienced substantial delays and lower than expected component deliveries from a very small group of suppliers. These were primarily for certain IC components that represent a very small fraction of overall materials. However, these delays and decommits impede Ciena's ability to build finished goods and systems such as modems.
Basically, this relatively small number of low cost, low value components is holding up a disproportionate amount of revenue, primarily for optical modems. As a result, that hurt Q3 revenue and adjusted gross margin to a significant degree. If not for this specific challenge, Ciena says it would have been at the high end of revenue guidance in Q3. This dynamic is expected to impact Q4 as well.
In sum, we suspect investors are bracing for a difficult Q4 report tomorrow morning. We think most eyes will be on the Q1 (Jan) guidance as investors will really want to hear there is some improvement on the supply chain front. Any positive comments about the supply chain, even if guidance is bad, would likely be a catalyst for the stock.
