Following the release of Ciena Corporation’s (CIEN) first quarter fiscal 2010 results on March 4, 2010, analysts have made both positive and negative revisions to their estimates.
Linthicum, Maryland-based CIENA is an original equipment manufacturer (OEM) of optical networking equipment, software and services. The company specializes in transitioning legacy communications networks to converged, next-generation architectures, capable of delivering a broader mix of high-bandwidth services.
First Quarter Detail
Ciena reported a wider fiscal 2010 first-quarter loss compared to the year-ago period due to increased expenses related to its pending acquisition of Nortel Networks (NT). The quarter included $27.0 million in acquisition and integration-related expenses associated with the pending acquisition of the optical networking and carrier Ethernet assets of Nortel’s Metro Ethernet Networks (MEN) business.
Ciena’s non-GAAP (excluding one-time and non-cash items, but including employee stock options expenses) net loss for the quarter increased to 21 cents per share versus a net loss of 9 cents per share in the year-ago period. The increase in net loss was due to higher operating costs in the quarter. Moreover, it was higher than the Zacks Consensus Estimate of a net loss of 16 cents per share.
Revenue of $175.9 million in the first quarter of 2010 was up 5.1% year over year. This was slightly lower than management’s expectation due to the adverse impact of recognition delays connected with initial deployments of new platforms with certain customers, partially offset by strong order flow. The growth in the quarter was driven by improvement in its Carrier Ethernet Service Delivery products and growth in core switching platforms.
Ciena has a reasonably strong balance sheet and exited the first quarter with $1 billion in cash and short-term investments.
Update on Nortel’s Assets Acquisition
Ciena has made a series of acquisitions to expand its addressable market and enter new growth markets. Ciena plans to complete the purchase of Nortel Network’s optical networking and carrier Ethernet business for a total consideration of $769 million ($530 million in cash and $239 million in convertible notes) by the end of March.
Ciena expects the deal to be significantly accretive to its operations in fiscal 2011. Ciena has completed applicable regulatory reviews in the United States and Canada. We believe that the deal has the potential to drive significant growth in Ciena’s rapidly expanding metro Ethernet business and optical networking products.
The uncertainty regarding the closure of the acquisition of Nortel’s assets adds to the risk, though if successful it will be significantly accretive to Ciena’s operations in fiscal 2011 and drive much higher revenue and profit growth. However, near-term results are expected to be pressured due to increased expenses related to its pending acquisition of Nortel.
Conservative Guidance
Ciena provided conservative guidance for the second quarter 2010 due to macroeconomic concerns. The company expects second quarter revenue to be in the range of $185 million to $195 million. While consumer spending is expected to remain weak, the company expects increased order flow.
On the conference call, however, management stated that it has been witnessing signs of improvement in North America. Moreover, demand for network optimization appears to be strong and the company is expected to benefit from the early stages of an industry-wide optical upgrade cycle. Newer solutions like switching platforms, carrier Ethernet service delivery platforms and carrier managed service solutions present significant opportunities for growth.
Although management remains cautious about year-over-year growth, it expects to grow once the economy recovers fully. Given the early signs of economic recovery, we expect growth to accelerate in 2011.
Estimate Revisions Trend
Ciena had experienced a rapid re-acceleration of revenue and profits, driving the stock price up dramatically through 2007 and 2008. However, revenues slid rapidly in 2009 and the company could not turn in a profit for the year. The company blamed the shortfall on a difficult economic environment and reduced carrier spending visibility.
While the company generated higher revenues in the first quarter of 2010, earnings slid dramatically. Although management has implemented restructuring actions to reduce operating costs, we do not expect Ciena to become profitable in the near term.
Moreover, the cautious second quarter guidance for 2010 prompted analysts following the stock to lower their estimates. Over the past 30 days, 4 of the 23 analysts following the stock have lowered their earnings estimates for the second quarter, with only 2 analysts moving in the opposite direction.
The current Zacks Consensus Estimate for the upcoming quarter is a loss of 16 cents per share with a downside potential of 6.25%. If the Nortel deal closes in March, we believe that the company may beat the current estimates.
In terms of earnings surprises, the company has been posting a wider loss since the fourth quarter of 2008. Loss has exceeded the Zacks Consensus Estimate in three of the last four quarters. With the four-quarter average at -31.0%, the trend indicates another negative surprise in the upcoming quarter.
Our Recommendation
Ciena’s FlexSelect platform has been gaining momentum and we believe the acquisition of Nortel’s assets and World Wide Packets will further strengthen its base. However, intense competition is eating into the company’s market share.
Although we do not expect Ciena to become profitable in the near term, we do expect a recovery in 2011 due to favorable operational execution and growth in data traffic. Thus we maintain a neutral rating on Ciena with a price target of $17.00.
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