Last quarter was bittersweet for Ciena (NASDAQ:CIEN) shareholders. Posting its second consecutive GAAP profit, the networking specialist nonetheless managed to miss analyst estimates for "pro forma" (Latin for "the kind you report when you don't have real") profits. On Thursday morning, Ciena aims to both post a real profit for fiscal Q2 2007, and beat the consensus for its third quarter running.

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts color Ciena's outlook. Eleven each say "buy" and "hold," and only one counsels selling.
  • Revenue. On average, they're looking for 37% sales growth to $179.4 million.
  • Earnings. Pro forma profits are expected to more than triple to $0.25 per share.

What management says:
Several things jumped out of last quarter's earnings news. The second consecutive GAAP profit, for one. The first quarter in which the firm earned a profit from operations, as opposed to from interest on its bank account, for another. The fact that gross margin slipped a bit sequentially, for a third. And the market's severe allergic reaction to all of the above, for a fourth. Read about them all in "Ciena Colored Red."

The big news in the months since Q4 earnings came out was the April announcement that CFO Joseph Chinnici will be leaving the building. Ordinarily a major negative, this departure seems less worrisome than most such announcements in that Chinnici gave about eight months' notice of his departure. This should allow for an orderly transfer of power to a new successor, allaying investor concerns that there's a reason Chinnici is jumping ship.

What management does:
The rap against Ciena seems to rest mainly on the fact that quarter-to-quarter gross margins (called "sequential") have fallen for three quarters running. As a result, Ciena remains in the middle of the network equipment-maker pack -- less profitable (meaning grossing less) than Juniper (NASDAQ:JNPR) and Cisco (NASDAQ:CSCO), but more profitable than Nortel (NYSE:NT) and Alcatel-Lucent (NYSE:ALA). Still, if you look at the year-over-year numbers reflected in the trailing-12-month performance shown below, you'll notice the gross continues to progress upward. Likewise the rolling operating margin. Likewise the net.

Margin

10/05

1/06

4/06

7/06

10/06

1/07

Gross

31.9%

35.9%

41.4%

44.7%

46.0%

46.5%

Operating

(42.5%)

(31.7%)

(20.0%)

(8.3%)

(1.4%)

2.1%

Net

(102.0%)

(85.0%)

(65.0%)

(50.8%)

0.1%

2.9%
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:
So to recap, gross margin is rising. Net profitability seems here to stay, and the firm now makes a profit from its operations as well. What's left to fix here?

Answer: free cash flow. As it stands, Ciena still isn't earning any actual cash profits -- it's all accounting profits, all the time. Ciena's $78.6 million in burnt cash over the last 12 months continues to belie its profitability under GAAP. But here, too, it's making progress. Cash burn over the last two reported quarters was down 22% year over year. With revenue continuing to mount, all other kinds of profitability in the bag, and this kind of momentum on the free cash flow front, I'm thinking there's a very good chance that by the time Chinnici finally does exit stage left, he'll be leaving an undeniably profitable enterprise in his wake.

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

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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.