Ciena (NASDAQ:CIEN) shareholders exhaled a sigh of relief -- and inhaled a healthy 6% share price boost -- on less-bad-than-expected earnings news yesterday. As I write this today, the boost continues. Here are the highlights:

  • Third-quarter sales of $164.8 million exceeded the Street's estimated $152.6 million, while the company's pro forma loss of $0.05 per share was eight cents better than expected. (However, under generally accepted accounting principles, the loss came to $0.29 per share.)
  • Moreover, Ciena guided investors to expect flat revenue sequentially in Q4 -- which would be a hair above current estimates of $163.4 million.
  • Last but not least, gross margin grew sequentially to 45%.

Explaining the upticks, CEO Gary Smith confided that although "customers ... continue to spend cautiously," things have "improved somewhat over the first half of the calendar year." Seems the likes of Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint Nextel (NYSE:S) are facing pressure from their own customers to "increase network capacity and deliver more services" -- which will require spending more on Ciena's high-tech gadgets and gizmos. Meanwhile, Ciena boasted that other clients -- NYSE Euronext (NYSE:NYX) and Clearwire to name a couple -- made sizable purchases of Ciena equipment in the quarter.

Of course, on the minus side:

  • Ciena's 45% gross margin doesn't exactly have rivals Cisco (NASDAQ:CSCO) and Juniper (NASDAQ:JNPR) quaking in their boots.
  • The same $165 million sales figure that "beat estimates" was down 35% year over year.
  • This year's loss was a reversal of last year's Q3 profit.
  • And it's a trend unlikely to change in the year's final quarter. Analysts expect a similar loss in Q4.

Honey, who shrunk the bank account?
And yet, when you get right down to it, my overall impression is positive. Free cash flow is negative for the year, but it's only been a $12.1 million cash burn year to date.

Would I prefer to see Ciena growing cash rather than incinerating it? Of course. But with $1.1 billion in cash and short-term investments against $800 million in convertible debt, the company's in little danger of running out of scratch anytime soon. If the sales collapse has indeed leveled off, and if this implies a return to Ciena's more profitable past, I think the company will emerge from the recession just fine.

Disagree? Feel free. Pan Ciena to your heart's content on Motley Fool CAPS. Click here to rant. Bullish comments are welcome, too, of course.