Networking specialist Ciena (CIEN -2.30%) was on the verge of breaking out three months ago thanks to an improving business environment that triggered a sharp increase in the orders it was receiving, so it wasn't surprising to see the company crush Wall Street expectations when it released its fiscal 2021 fourth-quarter earnings results on Dec. 9.
Ciena's stock price shot up 15.6% after the results were released. Let's take a closer look at why, and see if the stock is still a good bet for investors looking to take advantage of the 5G network rollouts across the globe.
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Ciena moves into the fast lane
Fourth-quarter revenue jumped 25.7% year over year to $1.04 billion, while adjusted earnings shot up 41.7% to $0.85 per share. The top line was just ahead of Wall Street's expectations of $1.03 billion in revenue, while its earnings were in line with what analysts were looking for. It is worth noting that Ciena's full-year revenue was up just 2.5% over the prior year to $3.62 billion, as the company was suffering from a weak telecom spending environment at the beginning of fiscal 2021.
The company's latest numbers indicate that it has now switched into a higher gear, and there's evidence that it won't be stepping off the gas anytime soon. That's because Ciena's orders in the fourth quarter exceeded its actual revenue once again, leading to sharp growth in the company's backlog.
This points toward robust demand for Ciena's products and solutions, and also means that the company can keep clocking impressive top-line growth as it fills more of its orders and turns the backlog into actual revenue. Ciena defines its backlog as a combination of customer purchase orders that haven't been shipped yet and customer orders that have been shipped but are waiting for acceptance by customers. The backlog is recognized as revenue when "control of the promised products or services is transferred to its customer."
Management indicates that the company has a book-to-bill ratio of more than 1, which means that the company is getting more orders than it can fulfill. It is also worth noting that Ciena expects to maintain a book-to-bill ratio of more than 1 this fiscal year, which means that it expects strong order inflows going forward.
CEO Gary Smith pointed out on the earnings conference call: "Orders in the quarter were once again significantly higher than revenue. And with our third consecutive quarter of orders outpacing revenue, we have substantial momentum and increased confidence in the demand environment."
Management added that the company finished the fiscal year with its highest-ever order backlog of $2.2 billion. Even better, Ciena's backlog doubled over last year, which explains why the company has sounded out solid guidance.
Ciena expects $890 million in revenue this quarter at the midpoint of its guidance range. The company had generated $828 million in revenue in the year-ago quarter, which points toward a 7.5% year-over-year increase.
However, Ciena estimates that its fiscal 2022 revenue could increase between 11% and 13%, indicating that its growth is expected to pick up the pace as the year progresses. That's not surprising as the company's order backlog equates to 55% of its projected annual revenue of $4 billion. Wall Street was expecting Ciena's full-year revenue to increase only 8%.
More importantly, it won't be surprising to see Ciena exceed its expectations this fiscal year thanks to strong catalysts such as 5G wireless networks.
Things are about to get better
Ciena is witnessing robust design-win momentum as the demand for its routing and switching solutions has increased on account of 5G network deployments, according to the CEO's comments on the earnings call: "In Q4, we secured a dozen new wins, including significant multiyear deals with two of the largest U.S. Tier 1 service providers, one of which is for a nationwide 5G sell-side router deployment."
Additionally, Samsung has chosen Ciena's solutions to support its 5G deployments. The two companies are collaborating to offer both hardware and software to telecom operators so that they can support the increase in 5G data volumes. This partnership with Samsung bodes well for Ciena as the former is one of the key players in the 5G telecom gear space with a market share between 10% and 15% in the first quarter of the year, according to market research firm Dell'Oro.
Gartner estimates that the 5G infrastructure market is set for another year of growth in 2022 with investments expected to jump to $23.2 billion from $19 billion this year. As such, Ciena's order book could continue to swell in the new year and drive stronger-than-expected growth. All this makes Ciena an enticing 5G stock to buy now as it is trading at just 20.7 times trailing earnings, which is cheaper than the S&P 500's earnings multiple of 28.
