Ciena Corp (CIEN)

[chmcnfunds]

MARCH 13, 2014
BY GREG QUINN

Ciena Corporation Posts Solid Quarter, Tempered Outlook
Despite a slightly tempered outlook, Ciena surprised the Street in the fiscal first quarter of 2014 with earnings per share $0.07 above consensus and $0.05 above our expectations. The EPS upside would have been even higher had it not been for $0.05 dilution from foreign-currency hedges in the other income line. Revenue was roughly in line with the Street but was guided $6 million below the Street at the midpoint because of seasonality and a back-end-loaded first quarter.

Despite the near-term softness, with several new projects underway—management calling out AT&T (T $32.13; Market Perform) and CenturyLink (CTL $31.19) commencing metro deployments and Ericsson (ERIC $13.05) and Vodafone (VOD $41.09) all part of the setup—Ciena looks well positioned for double-digit growth in 2014 and beyond, in our view. We remain encouraged by the continuing market transformation, characterized by capacity expansion from 10G to 100G and architectural changes resulting from a shift to OTN switching and converged packet optical technology, all of which are occurring with Ciena’s largest customers. In our view, there appears to be a long tail to this multiyear transition, which should lead to more sustainable and profitable company performance throughout 2014 and 2015.

With the April investor day the next catalyst, an increase in our fiscal 2015 estimates, and a relatively attractive valuation (1.2 times our calendar 2015 revenue estimate and 19 times projected EPS), we would add aggressively on any weakness in the stock. Given the early stages of the optical cycle, we believe it is reasonable to apply an 18- to 20-times P/E multiple on fully loaded calendar 2015 operating assumptions (10% operating margin), which yields roughly 25% expansion from current levels. We reiterate our Outperform rating.

Cutting second-quarter EPS to $0.12 (from $0.25)—on lower gross margin and higher operating-expense guidance—erases a large EPS beat in the first quarter; revenue is trimmed to $557 million (from $569 million). Our fiscal 2014 revenue estimate is unchanged at $2,305 million, while our EPS estimate falls to $0.87 from $0.93. Our fiscal 2015 revenue estimate goes to $2,600 (as we roll in about $50 million of Ericsson opportunity, and expect to add more as actual sales begin); our EPS estimate rises to $1.28 from $1.23. We introduced calendar 2015 estimates of $2,685 million (growth of 13% year-over-year) and $1.31.

Verizon came in close to a 10%-customer mark, and was the largest 100G contributor in the quarter. AT&T improved to 18.8% this quarter (from 16.5% in the fourth) and together with Verizon represented slightly more than 28% of Ciena’s sales in the quarter. This, in our view, should ease concerns of 100G long-haul saturation with Verizon and uncertainty about the commencement of a 100G long-haul project at AT&T. Management says both Verizon and AT&T will be up in 2014: Verizon’s 100G long-haul to be partly supplanted by 5400 switching and packet networking throughout the year, while AT&T upgrades its metro with Ciena’s coherent packet-optical technology as part of Project VIP (about 10% of the backbone covered to date, according to our checks). Moreover, metro is a much larger opportunity than long-haul.
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http://www.mkobserver.com/ciena-corporation-posts-solid-quarter-tempered-outlook/172379/

Looks like a good time to get back in Ciena:



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