Telecommunications network specialist, Ciena Corp. (CIEN) reported second quarter fiscal 2011 revenues and earnings per share (EPS) that missed the Zacks Consensus Estimate on both counts, primarily due to lower sales and pressurized margins.
Despite the miss, the company recorded year-over-year growth across all of its business segments driven by higher customer engagements, design wins and strong order flows.
Adjusted loss per share of 33 cents (including stock-based compensation expense but excluding one-time charges) widened from the year-ago quarter’s loss of 21 cents per share and missed the Zacks Consensus Estimate of a loss of 22 cents. Sequentially, EPS deteriorated from a loss of 24 cents.
Revenue
Total revenue of $417.9 million in the second quarter of 2011 was up 64.9% year over year from $253.5 million. Revenues decreased 3.6% sequentially from $433.3 million. The reported revenue was at the lower end of management’s guidance range of $405.0 million to $435.0 million and was also below the Zacks Consensus Estimate of $429.0 million.
The results partly reflect the effects of ERP system shutdown during the first 2 weeks of the second quarter in connection with the completion of the back-office integration of the Metro Ethernet Networks (MEN) business. The shutdown resulted in reduced fulfillment and shipping capabilities during the quarter. Additionally, carriers, which have been testing Ciena’s new generation switches, have delayed orders for existing switches.
Product revenue, which comprised 80.4% of the total revenue was up 62.8% from the prior-year quarter to $336.0 million. Revenue from services, representing 19.6% of the total, increased 73.9% from the year-ago quarter to $81.9 million.
Sales to international customers represented 45.0% of the total revenue in this quarter versus 49.0% in the previous quarter. The company had two 10.0% plus customers in the quarter, which accounted for 26.0% of total sales.
Margins
Adjusted gross profit escalated 38.8% year over year to $171.6 million in the quarter, mainly attributable to improved operating efficiencies. A lower revenue base in the year-ago period led to the decline in gross margin, which came in at 41.1% compared with 48.8% in the year-ago quarter.
Higher research, development and marketing expenses increased the total operating expenses by 40.4% year over year to $193.9 million in the quarter.
Adjusted operating loss increased 54.2% from the year-ago quarter to $22.2 million.
Balance Sheet & Cash Flow
Ciena exited the quarter with $506.8 million in cash and cash equivalents, down from $625.8 million in the previous quarter. The company used $115.4 million in cash from operations versus $63.7 million cash used in the prior quarter.
Guidance
Ciena expects third quarter 2011 revenues in the range of $435.0 million to $455.0 million.
Going forward, management expects the industry’s transition to optical transport network (OTN) and the strong alignment of Ciena’s solutions to customer priorities to drive future growth and operating leverage.
Adjusted gross margin is projected to be in the low 40% range, consistent with the company’s near-term expectation. However, management expects adjusted operating expenses to be below the second quarter levels in the low to mid $180 million range.
Management expects third quarter total diluted share count to be approximately 150 million, assuming the conversion of all 4 issues of convertible debt.
The company did not provide any earnings per share guidance. However, the Zacks Consensus Estimate, when the company announced results, was pegged at 1 cent loss for the third quarter 2011.
Our Take
Near-term results are expected to remain under pressure due to increased expenses, slowdown in carrier spending, intensifying competition from Cisco Systems Inc. (CSCO) and Alcatel-Lucent (ALU) and continued losses.
Although the guidance for the third quarter remain weak, we anticipate a recovery based on favorable operational execution and a new product line up, which will lead to a gradual improvement of results in 2011.
We have a long-term Neutral recommendation on Ciena shares. Ciena currently has a Zacks #3 Rank, implying a short-term Hold rating.
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