Ciena Is Building an Empire From Spare Parts

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Long-distance networking specialist Ciena (Nasdaq: CIEN  ) beat its own sales targets in the fourth quarter.

Mind you, the target itself was a disappointment three months ago, and Ciena would have missed the top-line Street consensus in effect at the time, but $418 million of total revenue was still a healthy 7% improvement over the previous quarter.

Moreover, management projects continued sales growth in the quarter that's under way now, with strong gross margins to boot. That was enough good news to catapult Ciena's stock to a more than 10% overnight gain in early morning trading, even if the $0.18 non-GAAP loss per share was a bit worse than expected.

I'm not comparing results year over year because Ciena's acquisition of Nortel's Metro Area Networks assets in March throws every comparison seriously out of whack. What's clear is that the deal adds up to more than the sum of Nortel's and Ciena's parts, and that the company is on a good trajectory once all the integration costs and headaches have been worked out of the system.

CEO Gary Smith intends to build on his newfound economies of scale to "capitalize on future growth opportunities and improve operating leverage." In plain English, that means improving sales growth and stronger margins ahead -- assuming the company keeps executing according to plan.

Compare and contrast this focused approach with the scattershot strategy we've seen from Cisco Systems (Nasdaq: CSCO  ) in recent years, and the stock charts start to make sense; Cisco has dropped 19% over the past year while Ciena has climbed 32%. Ciena's stock has beaten all comers over 52 weeks, crushing Cisco and Alcatel-Lucent (NYSE: ALU  ) and inching ahead of Juniper Networks (Nasdaq: JNPR  ) today.

Will Ciena squeeze new synergies out of its Nortel assets to keep rewarding shareholders in 2011? It looks that way to me, but a mere two-star Motley Fool CAPS rating out of five indicates otherwise. I'm throwing my All-Star CAPS weight behind this stock with an outperform rating right now, and you can add your opinion.

Fool contributor Anders Bylund doesn't hold a position in any of the companies discussed here. The Fool has written calls (bull call spread) on Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

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  • Report this Comment On December 09, 2010, at 3:51 PM, BradReeseCom wrote:

    Ciena's Nortel MEN business contributed $255.6M (39%) in its second full-quarter.

    Ciena booked its first order of the next-gen 5400 family of switches with a tier-1 North American carrier in F410. The product line is expected to generate meaningful revenues in F2H11 which may positively impact margins.


    Brad Reese

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