Foolish Forecast: Ciena May Give an Unpleasant Jolt

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Ciena Corp. (Nasdaq: CIEN) reports fiscal third-quarter 2008 results Thursday morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell or waffle? Nineteen analysts color Ciena's outlook: 10 say to buy it, eight vote hold, and one says to sell it.
• Revenues. On average, they're looking for 24% sales growth, to $253.6 million.
• Earnings. Pro forma profits are expected to fall 10%, to $0.37 per share.

What management says:
CEO Gary Smith boasted last quarter about how Ciena is eating its competitors' lunch. Growth at Ciena has been "faster-than-market," he said, implying that Ciena may be taking market share from rivals like Cisco (Nasdaq: CSCO), Nortel (NYSE: NT), and Alcatel-Lucent (NYSE: ALU). Management named two companies, Embarq (NYSE: EQ) and NTELOS Holdings (Nasdaq: NTLS), as customers that have recently chosen its products. Meanwhile, Smith tells us that both operating profit margins and net income are "solid."

What management does:
The numbers back Smith up on both counts. Operating margins are going gangbusters at Ciena; the rolling net and gross margins are up nicely as well. We may not yet be at Cisco or Juniper (Nasdaq: JNPR) levels of profitability, but we're headed in the right direction.

Margins	1/07	4/07	7/07	10/07	1/08	4/08
Gross	46.2%	44.7%	45.0%	46.5%	48.1%	50.6%
Operating	1.2%	1.7%	3.5%	5.6%	6.2%	9.5%
Net	2.9%	4.9%	9.0%	10.6%	11.9%	12.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Which is why it pains me to point out a quirk that could set Ciena back. Management warned in July that two of its investments in structured investment vehicles are continuing to head south. They've already cost Ciena $13 million; this quarter, they'll lop another $5 million or $6 million off of profits. (Call it a nickel per share.) It doesn't look to me, though, like Wall Street has factored these investment losses into its estimates -- which are, after all, pro forma in nature.

Investors may suffer a nasty surprise when they read the GAAP numbers on Thursday.

What did we expect out of Ciena last quarter, and what did we get? Find out in:

• Ciena Gets the Green Light
• Foolish Forecast: Ciena Shines, Price Glares
• Now's the Time to Load Up on These Stocks