Tic-tac-toe, investors want to know: After beating earnings estimates in each of the last two quarters, can network specialist Ciena (NASDAQ:CIEN) make it "three in a row" when it reports its fiscal 2007 numbers tomorrow morning?

What analysts say:

  • Buy, sell, or waffle? Twenty-three analysts still color Ciena's outlook. A dozen say to buy it, and 11 more vote hold.
  • Revenue. On average, they're looking for 32% sales growth to $211.3 million.
  • Earnings. Pro forma profits are expected to nearly triple to $0.42 per share.

What management says:
Just before last quarter's earnings release, fellow Fool Anders Bylund observed that the company's "strategy is getting some serious traction right now." No sooner said than proven, Ciena dutifully produced a Q3 earnings release boasting 34% sales growth and its fourth quarter in a row of positive net earnings.

Citing "industry trends" toward increasing demand for "network capacity and the transition to Ethernet/IP-based network infrastructures," which would affect both telecommunications customers such as AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint Nextel (NYSE:S) and cable customers such as Cablevision (NYSE:CVC) and Time Warner Cable (NYSE:TWC), CEO Gary Smith predicted continued "improved financial performance" in quarters to come.

What management does:
Where might we first see such improvement? Well, gross margins have been a bit choppy of late. A resumption of the consistent growth we've seen there in quarters past would be nice. But in general, with operating and net margins both clearly on an uptrend, I'm willing to give Ciena the benefit of the doubt on its prediction.

Margins

4/06

7/06

10/06

1/07

4/07

7/07

Gross

41.3%

44.5%

45.7%

46.2%

44.7%

45%

Operating

(22.4%)

(10.5%)

(3.8%)

(0%)

1.7%

3.5%

Net

(65%)

(50.8%)

0.1%

2.9%

4.9%

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:
What's more, to accomplish the predicted "improved financial performance," all Ciena really needs to do is just keep on doing what it's been doing. Over the last couple of quarters, we've seen sales grow at 40% year over year. Meanwhile, the company's keeping a tight leash on costs. Neither selling, general, and administrative expenditures, nor research and development spending, have exceeded 15% growth within that time period. If Ciena can keep it up, operating and net margins will continue to expand.

This is great news for cash flow as well, as Ciena's customers are buying its equipment not just as fast as, but faster than it can make the stuff. In the most recent quarter, inventories grew just 10% year over year, despite sales that rose at triple that pace. With less inventory sitting on stock shelves, and more being converted into cash, the company has just put together back-to-back quarters of positive free cash flow -- the first time that's happened since January 2002.

Looks like it should be a merry Christmas indeed for Ciena shareholders.

The skinny on Ciena:

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