Ciena (NYSE:CIEN), the leading designer of wave division multiplexing (WDM) equipment -- which is optical transmission systems -- for the telecom, service provider, cable, and data center industry, recently reported impressive fiscal third-quarter earnings. Revenue grew 8.7% to $728.8 million while adjusted net income increased 21.4% to $0.51, beating analyst expectations. However, Ciena's stock sold off roughly 10% after management gave underwhelming guidance for the current quarter. Here's why I think the pullback may be a buying opportunity.
The upcoming quarter
For the current quarter, Ciena guided to revenue of only $720 to $750 million, well below analyst estimates of $770 million and amounting to only 2.6% growth.
The company attributed the slowdown to a delay in government contracts (due to the ongoing budget battles in Washington), as well as a few delays in some U.S. regional telecoms going through tough merger integrations. Thus, the delays were due to the health (or lack thereof) of the end customer, not due to Ciena's offerings or long-term opportunity.
Moreover, management gave several positives that should encourage investors with a long-term view. Here's what Ciena management wants you to know.
Outdoing the competition
Despite the lumpy nature of Ciena's revenue, its competitive position is strengthening. According to industry research group Dell'Orro, the overall optical transport segment declined 3% last quarter, while Ciena grew revenue 8.7%. That means the company took market share from competitors.
The industry is going through an especially deep trough in North America, Ciena's largest market. The overall North American region declined 9.6% in the last four quarters. Meanwhile, Ciena grew North American revenue 6% in that time. That's a great sign for the company.
Adding color to this was Ciena CEO Gary Smith:
It's becoming very clear that the vendor selections of our customers and the weakening financial results of our peers continue to rationalize our fragmented competitive landscape toward a smaller number of successful strategic players that truly have global scale with obvious winners and losers emerging.
This is an important phenomenon. Management is saying the current softness being felt by Ciena and industry peer Infinera (NASDAQ:INFN) will cause smaller companies to either merge or exit the business. That will leave the remaining companies with more market share and pricing power. That's the phenomenon that happened recently in the airline industry, and what compelled Warren Buffett to change his mind about it.
Management was particularly excited about several new products scheduled to hit the market in the coming quarters. Executives highlighted Ciena's new Wavelogic Ai chip, which will allow for 400G transport (double the capacity of the prior Wavelogic 3), and, as the "Ai" name indicates, will have a lot of ways to automate and tune capacity up or down as needed across a network.
The company also pointed to growth in its relatively new software business, named Blue Planet. Blue Planet is network intelligence software that allows for software-defined orchestration, automation, and diagnosing network health. Ciena now has 25 Blue Planet "engagements," with eight active trials and four customers that have deployed.
Software is still small for Ciena, at only 5.8% of revenue, but its offerings could grow. Great software could also provide incentive for customers to purchase Ciena's hardware products in a bundle.
Finally, despite a weak North America market, management pointed to Ciena's leading position in several high-growth verticals: data center interconnect, India, and subsea. On data center, the rise of cloud computing and streaming content providers will clearly be a growth driver for years to come.
With respect to India, Ciena is the No. 1 vendor, adding a top-three service provider last quarter (Ciena now sells to all of the top three Indian service providers). India is building out high-speed internet capacity for the first time in much of the country, and Ciena's Indian revenue grew a whopping 80% for the past nine months.
Finally, management also said Ciena is reaping the benefits of its partnership with TE Connectivity for new subsea cable deployment -- a market where Ciena has 40% market share. The company believes that segment will grow strongly over the next few years due to current capacity constraints.
Mr. Market was not enthralled with Ciena's guidance for the upcoming quarter, but its competitive position in a growing overall market is strengthening. That means Ciena could be a compelling opportunity for those looking at the long term, as the need for bandwidth -- and therefore WDM products -- explodes.