Monday, December 17, 2012

Ciena (CIEN) an investor darling

Despite missing on earnings per share in its fiscal fourth quarter and entering what management describes as “a quarter in which we typically experience seasonal reductions in order volume and customer deployment activity,” shares in Ciena Corp.  rose on Wall Street yesterday.
Analysts speculated that the growth in order backlog may have led investors to conclude that Ciena is in good shape for a hoped-for future turnaround in fiber-optic network equipment spending.
Ciena reported December 13 results for its fiscal fourth quarter, which ended October 31. Revenues of $465.5 million represented a 1.8% sequential decline but a 2.2% improvement over the year-ago quarter. For the recently concluded fiscal year, Ciena reported $1.8 billion in revenue, up from $1.7 billion for fiscal 2011.
GAAP net loss for the recently concluded quarter was $38.8 million ($0.39 per common share), worse than the GAAP net loss of $22.3 million ($0.23 per common share) suffered in the year-ago fourth quarter. For the fiscal year 2012, Ciena reported a GAAP net loss of $144.0 million ($1.45 per common share) versus a GAAP net loss of $195.5 million ($2.04 per common share) for fiscal year 2011.
“With five percent annual revenue growth and fourth quarter financial performance in line with our expectations, we continued to significantly outpace the market and take share in 2012 despite the challenging environment. That momentum resulted in record order flow and year-end backlog,” said Gary Smith, president and CEO of Ciena, via a press release. “Customers require more network convergence with greater programmability to deliver more services, and we believe our portfolio is leading the transformation to next-generation intelligent networks.”
Investors appeared to buy the story, despite the fact that Ciena guided revenues for the first quarter of fiscal 2013 at $435 to $460 million, with adjusted (non-GAAP) gross margin percentage in the low 40s and non-GAAP operating expense in the high $180s million range. Shares of the company’s stock closed yesterday at $15.80, up from the previous day’s $15.57 on a volume of 15,671,698.
Investor enthusiasm for the stock left several analysts puzzled. “A record $2 billion of orders in FY12 and 25% backlog increase to $900 million along with hope regarding a capital spending cycle seems to have fueled investor optimism,” wrote Raymond James analyst Simon Leopold in a note to investors by way of example. “We note that FY11 ended on a similarly upbeat note with backlog rising ~20%, yet FY12 fell short of expectations.
“The intraday rise in Ciena's shares surprises us and appears as a hope trade (i.e., belief that it generates significant growth and margin improvement eventually),” continued Leopold, who has Ciena’s stock rated as “Market Perform.” “Ciena's return to profitability and achievement of its long term 10% to 12% operating margin target slide out in time again. We remain optimistic regarding demand, but we're surprised and disappointed by the higher expense and lower margin outlook.” 
Weakness in both packet-optical transport and packet-optical switching led to the sequential revenue decline in the fiscal fourth quarter. Packet-optical transport sales shrank $9.1 million sequentially, while packet-optical switching revenue retreated by $17.3 million

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