When optical networking expert Ciena (NYSE:CIEN) reported earnings on Thursday morning, it sparked a wholesale revival across the industry.
Sales improved 6% year over year to $508 million, yielding a $0.02 net profit per share. Analysts were looking for $484 million and a $0.01 loss per share, and management raised next-quarter revenue guidance well above Wall Street's targets.
Ciena's own shares jumped more than 17% on Thursday, setting fresh 52-week highs. But this victory parade wasn't Ciena's personal party. Investors took the strong report as a sign of renewed spending on high-speed networking infrastructure, and the rising tide lifted lots of boats.
Close competitor NeoPhotonics (NYSE:NPTN) soared 15% higher. Larger rival JDS Uniphase (NASDAQ:VIAV) jumped 7.9% to become the fastest gainer on the S&P 500. If Ciena can beat its own expectations in selling Internet backbone equipment to a bevy of major telecoms, its chief rivals must eventually follow suit. JDS is only one month removed from its latest quarterly report, which sent shares diving 7% overnight (but all was forgiven a week later). NeoPhotonics also reported in early May, but didn't make any waves then.
Watching Ciena come on strong only four weeks later tells us one of two things: Either Ciena is killing its rivals in the marketplace, or the sluggish networking sector is finally due for a big order bounce.
Ciena CEO Gary Smith certainly gave investors reason to believe in the latter. "Basically, the architectural changes taking place in the network today are all driven essentially by the end user," he said on Thursday's analyst call. "For example, networks are now being affected by tremendous growth in cloud computing, mobility and machine-to-machine applications, profound and highly disruptive movements that are only just beginning."
Smith also expected the company to grow faster than the market, but it's pretty much his job to present Ciena as a market leader. There's no doubt in my mind that the global networking market is overdue for a spending boost, especially in the light of high-speed mobile connections going mainstream everywhere. Ciena taps into that trend, but needs to watch out for rivals like JDSU and NeoPhotonics along the way. All things considered, I think the market reaction this week was just about correct across the optical sector.