Foolish Forecast: Will Ciena Get Its Share of the Pie?

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After beating earnings estimates for most of last year, Ciena (Nasdaq: CIEN) aims on Friday to start its new fiscal year off right. Last quarter's earnings guidance set the bar low, but will it be low enough?

What analysts say:

• Buy, sell, or waffle? Twenty-one analysts still color Ciena's outlook. Ten say to buy it, and 11 vote hold.
• Revenue. On average, they're looking for 37% sales growth to $225.6 million.
• Earnings. Pro forma profits are expected to nearly double to $0.40 per share.

What management says:
Let's see here ... over the past quarter, Ciena has settled a lawsuit with Northrop Grumman (NYSE: NOC), costing Ciena $7.7 million. It finalized its acquisition of World Wide Packets -- that's another $208 million, and 2.5 million shares' worth of stock dilution (3.4 million once you count the premerger stock options program Ciena inherited). But the biggest news came not from Ciena, but from rival Cisco (Nasdaq: CSCO) and customer AT&T (NYSE: T). A couple of days ago, Cisco updated investors on how it sees things playing out in the telecom equipment industry, predicting only "short-lived and shallow" bumps along the road to growth; that's good for Ciena. Cisco also asserted that it is taking market share from its rivals, which doesn't sound as good for Ciena.

Back on the plus side, AT&T announced this morning that it will spend $1 billion to upgrade its network this year. Assuming Cisco doesn't eat the whole pie, that should leave a piece of extra business for Ciena to gnaw on. And if this sets off an arms race among Verizon (NYSE: VZ), Sprint Nextel (NYSE: S), and Comcast (Nasdaq: CMCSA), any of which may decide they need to upgrade to keep up with AT&T, there could be additional pies to taste.

What management does:
Now take all the extra revenue, and magnify it with the strong growth in margins we see below, and you've got a formula for superb earnings growth over the course of this year.

Margins	7/06	10/06	1/07	4/07	7/07	10/07
Gross	44.5%	45.7%	46.2%	44.7%	45.0%	46.5%
Operating	(10.5%)	(3.8%)	(0.0%)	1.7%	3.5%	5.6%
Net	(50.8%)	0.1%	2.9%	4.9%	9.0%	10.6%

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:
Now, don't assume that all this good news is going to lift Ciena's stock price. It certainly could, but the company is already trading for a pretty rich multiple of 30 times trailing earnings (versus 20% projected long-term profits growth). And while Ciena's free cash flow is growing strongly, it still hasn't quite caught up with the number quoted as net earnings under GAAP.

To reach an attractive valuation, Ciena's going to need to place strongly in the pie-eating contest described above, and build on its trend of ever-expanding margins. Tune in next week, when fellow Fool Anders Bylund takes a look at Ciena's progress on these two fronts.

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

• Ciena Overshoots, Underpromises
• Foolish Forecast: Ciena Shoots for Three