Editor's note: This article has been corrected to reflect that the analysts' estimate was for a pro forma loss of $0.08, and that Ciena missed that pro forma earnings number by just one cent.
No, no, Ciena (NASDAQ:CIEN). You got it all wrong. It goes "under-promise, over-fulfill."
Some Fools may recall that, back in February, I warned: "When a company starts trumpeting every single sale, or previewing good news before it is actually 'news,' look out, Fools." Pretty prescient, eh?
Back in Q1, Ciena had missed consensus earnings estimates, attributing the miss to a slight delay in being able to recognize the revenue from a sale to a single customer. That actually portended well for the Q2 results, as the Q1 revenue should have shifted into the just-completed quarter. Accordingly, the company predicted a sequential revenue increase of as much as 20%.
Oops. Thursday morning, Ciena announced that its second-quarter revenues missed that target (scoring just 12.5%). Meanwhile, the company missed consensus estimates for earnings yet again. Analysts had expected the company to post a pro forma loss of $0.08 per share. The actual result: a $0.09 per-share pro forma loss.
Moreover, both of those numbers understate the company's true losses under GAAP accounting, as they exclude restructuring costs, amortization, and other onetime expenses and gains. Add all of those back in and Ciena lost $0.16 per share.
So, in sum, over the past two quarters, it has become apparent that Ciena's revenue and earnings predictions need to be read with a full salt shaker close at hand. Keep that in mind when considering the company's latest prediction that Q3 revenues will increase "by as much as 30%" sequentially.
Finally, here are the implications I see for the telecom equipment makers, including Ciena peers Cisco (NASDAQ:CSCO), Lucent (NYSE:LU), Alcatel (NYSE:ALA), JDS Uniphase (NASDAQ:JDSU), and Nortel (NYSE:NT). While Ciena's earnings release did not highlight this point, the company's gross margins plummeted during the quarter. At nearly 25% a year ago, they collapsed to just 11% for second-quarter 2004. Revenues hardly budged over the course of the year, but the cost of raw materials appears to be rising. If that is true across the telecom industry, everyone's margins could be at risk.
What's your opinion of Ciena and its prospects? Share your thoughts on the Ciena discussion board.
Fool contributor Rich Smith owns no shares in any of the companies mentioned here.
