Ciena Corporation Earnings: Why Are Shareholders Scared?

Even though the networking-equipment maker has finally seen a turnaround in the industry, the stock has sold off. Who's right?

Jun 2, 2014 at 10:33PM

On Thursday, Ciena (NYSE:CIEN) will release its quarterly report, and even though analysts expect solid growth from the networking-equipment maker, shareholders have sent the stock downward. Even as larger Alcatel-Lucent (NYSE:ALU) and Juniper Networks (NYSE:JNPR) have largely held onto their gains on more bullish outlooks for their future fundamentals, Ciena bears greater risk because of its smaller size and greater dependence on certain key customers.

From giant manufacturers down to small niche players like Ciena, telecom and networking-equipment companies rely on telecom-industry customers to buy their products. Yet until recently, major telecom companies were reluctant to take on massive capital-spending projects, instead conserving cash and forcing Ciena, Alcatel-Lucent, Juniper, and their peers to make do with sales that were well below their respective manufacturing capacity. More recently, though, signs of better conditions in the telecom sector have led to a rebound for equipment sellers. Let's take an early look at what's been happening with Ciena over the past quarter and what we're likely to see in its report.

Cien
Source: Ciena.

Stats on Ciena

Analyst EPS Estimate

$0.13

Change From Year-Ago EPS

550%

Revenue Estimate

$560.87 million

Change From Year-Ago Revenue

10.5%

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Ciena earnings grow fast enough?
Analyst have had mixed views on Ciena earnings in recent months, cutting their April-quarter estimates by about a third but raising their projections for fiscal 2015 by about 3%. The stock has sunk badly, losing a quarter of its value since late February.

Cien

Source: Ciena.

Ciena's fiscal first-quarter earnings report set the stage for the stock's recent downslide, as the company performed reasonably well but gave weak guidance for the second quarter. Revenue jumped 18% in the first quarter, pushing adjusted earnings up 8% to more than double what investors had expected to see. But Ciena shareholders were somewhat disappointed in the company's sales-guidance range, whose midpoint fell below their expectations.

Yet the real damage to Ciena's stock came in April, when the company said that its operating margins would be closer to the bottom of its previously projected 7% to 10% range. Shareholders inferred that struggles to boost profits meant that competition from Alcatel-Lucent, Juniper Networks, and other players in the telecom and networking-equipment space was heavy enough to cause pricing pressure, and given its relatively small size, Ciena has to be particularly sensitive to ensure it delivers value to its customers.

Still, Ciena has a number of strong customers looking at utilizing its products. In particular, with major telecom companies in the U.S. looking to expand their high-speed broadband Internet service capabilities, Ciena's 6500 packet-optical platform has been a popular choice, as it allows for 40G and 100G solutions that are designed not just for ordinary high-density metro-area use but also for more demanding environments including submarine and long-distance land-based needs. Moreover, with international scope, Ciena hopes to outdo Juniper, Alcatel-Lucent, and other rivals by taking full advantage of the expansion of Internet capabilities around the world.

In the Ciena earnings report, watch to see whether the company is able to make good on its reduced expectations for quarterly results. If it falls short again, then Ciena's investors might start to lose confidence about the company's long-term prospects as well.

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