What happened

Ciena Corporation (NYSE:CIEN) reported its third-quarter earnings this morning and beat analyst estimates handily, earning $1.06 per share (adjusted), versus the Street consensus expectation of $0.83.  

That's the good news. Now here's the bad: Guidance at Ciena was exceptionally weak, and that weak guidance is destroying Ciena stock in morning trading. As of 10:15 a.m. EDT, Ciena stock is down a staggering 24%, and fellow networking equipment industry players Infinera (NASDAQ:INFN), Lumentum Holdings (NASDAQ:LITE), and II-VI Incorporated (NASDAQ:IIVI) are falling in tandem, down 16.3%, 11%, and 9.1%, respectively.

3 red arrows going down and crashing through the floor

Image source: Getty Images.

So what

So what did Ciena say to cause so much consternation on Wall Street?  

As already mentioned, the headline numbers were good. Sales grew 2% in Q3 despite the coronavirus, rising to $976.7 million, which was better than the $971.8 million that analysts had predicted. Pro forma earnings eclipsed estimates, and the company's profits as calculated according to generally accepted accounting principles (GAAP) jumped 65% year over year to $0.91.

The problem was with guidance. CEO Gary Smith warned investors on the company's post-earnings conference call that Ciena suffered "a meaningful ... broad-based ... slowdown in orders" late in Q3. The CEO commented further that it looks like telecom equipment spending was "somewhat front-end loaded in the calendar year, resulting in lower orders in our third quarter," and implying that total growth in spending on optical equipment this year will be at best in the "low single digits," and at worst, "flat."

Accordingly, Ciena management now forecasts fourth-quarter revenue of only $800 million to $840 million, versus analyst estimates of nearly $1 billion, according to a report by TheFly.com.

Now what

That's the bad news for Ciena. Now here's where it gets worse for everybody else:

Ciena's troubles, it seems, are not limited to Ciena -- in fact, the opposite may be true. Smith noted that amid the slowdown in spending, Ciena has "gained share, significant share" over its competition. And when quizzed by analysts on the earnings call as to why rivals like Infinera, Lumentum, and II-VI have not reported a similar slowdown in sales, Ciena's response was downright ominous:  

"We have a quarter that's slightly off in terms of most of our peers, competitors and customers," he said, and for this reason the slowdown in sales "might not have been evident to [competitors] at the time they did their earnings." Nonetheless, "you will be hearing this from our competitors, peers and even customers, frankly." "We believe this [slowdown] is very broad," he continued. "And everyone will be talking about this over the next several quarters."

Indeed, it seems everyone is already talking about it today -- and selling because of it, too.