Back With a Bang, This Tech Stock Is Set to Get Better

After a sluggish start to the year, this tech company has made a solid comeback, and things could get even better.

Jun 9, 2014 at 4:30PM

Ciena (NYSE:CIEN) has finally come out of its slump. The networking equipment company was in the doldrums a couple of months ago due to several factors. Uncertain infrastructure spending, an analyst downgrade, and negative vibes from industry bellwether and rival Cisco (NASDAQ:CSCO) dampened the mood in the industry, pressuring Ciena's shares. Now, it has made a terrific comeback.

Back with a bang
When Ciena posted its second-quarter results in the first week of June, it shot up 18%. Revenue was up 10% over the prior-year period, while adjusted net income jumped to $19.4 million from just $2.2 million in the year-ago period.  The company's top and bottom lines thrashed analysts estimates comprehensively, and a sizzling outlook helped matters further.

Ciena expects revenue of $585 million to $615 million in the current quarter, way ahead of the $583 million consensus. The mid-point of its guidance in the current quarter is up 11.5% over the year-ago period, indicating that Ciena expects its top line to improve at a better rate this quarter. Now, if we look at the different trends in the industry, it isn't surprising to see why Ciena expects its business to pick up going forward.

Optical-networking growth
The company is seeing strong demand in the optical-gear networking market as its biggest client, AT&T (NYSE:T), is rolling out a fiber network. AT&T accounts for almost a fifth of Ciena's revenue, so its optical products should be in good demand going forward. 

Recently, AT&T announced that it is preparing to roll out high-speed fiber Internet connectivity in around 100 cities across 21 metropolitan areas.  The service will be known as AT&T U-verse With GigaPower, and puts Ma Bell in direct competition with Google, which is already busy rolling out a fiber network. 

AT&T aims to deliver broadband speeds of up to 1 gigabit per second, around 100 times faster than current broadband speeds across the U.S. This sounds like an aggressive deployment, and since Ciena has a history of supplying optical networking gear to AT&T, it should benefit from the GigaPower initaitive. AT&T uses Ciena's 6500 packet-optical platform for the deployment of its metro services already, and this product should gain more traction with the fiber-to-the-home infrastructure build-out. 

Ciena is seeing a shift in the spending pattern. According to the company, carriers are allocating more budget toward optical solutions in order to create new revenue generating services. As such, Ciena has been able to expand its relationship with Tier 1 customers since it provides solutions such as carrier managed services, and applications such as cloud services, data center interconnection, etc.

SDN moves
Ciena is also looking at software-defined networking (SDN) for growth. The company is in partnership with several key players in the industry to develop an open ecosystem of virtualized resources. For example, it is working with Ericsson to develop SDN control software and with Brocade to enable on-demand provisioning in data centers. 

If Ciena succeeds in the SDN market, it can hit gold. According to Transparency Market Research, the SDN market is expected to be worth $3.5 billion by 2018, growing at an annual rate of almost 62%. Success in this market will help Ciena go one-up against Cisco, which is trying hard to combat the SDN threat. 

As reported by Forbes, Cisco has been simplifying its enterprise marketing model in order to attract more customers. The networking giant is bundling its services into four categories to counter other SDN platforms promoted by the likes of VMware and Juniper Networks. The adoption of software-based networks is threatening sales of Cisco hardware, as SDN can be implemented on cheaper networking equipment. 

Cisco is now trying to bring its own standard, OpFlex, for SDN applications. However, because the rest of the industry is already on the OpenFlow protocol, Cisco is going against the stream. Ciena's products support the OpenFlow protocol, so it is on the right team and can do better than Cisco in this department going forward. 

The takeaway
After a period of sluggishness, Ciena is back with a bang. The trends in the optical-networking industry are positive and Ciena's attempts to make a move into the SDN market are laudable. As such, the networking gear maker should continue doing well going forward and rise to new highs.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends 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. The Motley Fool has a disclosure policy.

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