Telecommunications network specialist Ciena Corp. (CIEN) reaffirmed its outlook for the fourth quarter of fiscal 2010, given out during the third quarter earnings call on September 8, 2010.

Although the company enjoyed a recovery in customer activity and growing demand, it apprehends that macroeconomic conditions will remain volatile.

Ciena expects fourth quarter revenues to increase sequentially by 5% or approximately $390 million to $409 million, in line with the Zacks Consensus Estimate of $405.0 million.

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 fourth quarter is pegged at a loss of 26 cents per share, above the year-ago quarter’s loss of 21 cents.

Ciena also announced in a separate release that it plans to offer $175 million of convertible senior notes due 2018, with up to an additional $35 million to cover over-allotments. Proceeds will be used for general corporate purposes, including the repurchase of its outstanding 0.25% convertible senior notes due May 1, 2013.

Third Quarter Highlights

Third quarter fiscal 2010 loss of $16.7 million or 18 cents per share (including Nortel’s assets) increased from a loss of $13.4 million or 15 cents in the year-ago quarter.

Excluding stock based expenses, amortization of intangibles and one-time charges, adjusted loss per share of 9 cents was up from the year-ago quarter’s loss of 5 cents per share. However, the results were better than the Zacks Consensus Estimate of a loss of 44 cents.

This was the first full quarter to include the operations of Nortel Networks’ Metro Ethernet Networks (MEN) business, acquired on March 19, 2010. The quarter included $17.0 million in acquisition and integration-related expenses associated with the acquisition of the optical networking and carrier Ethernet assets of Nortel’s MEN business.

Total revenue of $389.7 million in the third quarter of 2010 was up 136.5% year over year from $164.8 million. Total revenue includes $221.8 million (56.9% of total revenue) from the acquired MEN assets of Nortel Networks as of March 19, 2010. Revenues were in line with management’s guided range of $375 million to $400 million and the Zacks Consensus Estimate of $386.0 million.

Revenues (including Nortel’s contribution) in the reported quarter include $312.4 million in product revenues (80.2% of total revenue) and $77.3 million in services revenues (19.8% of total revenue). Sales to international customers represented 41.0% of total revenue in the quarter versus just 29.0% in the previous quarter. This indicates that Ciena is gaining an increased international presence.

Recommendation

Ciena has been ramping up its product portfolio and is expected to come out with new products in 2011. We believe that Ciena will be successful in leveraging its new product portfolio into existing customer relationships and sign new customers looking for a single company with a complete range of Ethernet solutions.

We anticipate a recovery based on the favorable operational execution, which will lead to a gradual improvement in results. However, near-term results are expected to remain under pressure due to increased expenses, a volatile European market, a slowdown in carrier spending and continued losses.

Ciena currently has a Zacks #2 Rank (Buy) rating on a short-term basis while longer-term our recommendation remains Neutral.

 
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