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Foolish Forecast: Ciena Shareholders Spooked

By Rich Smith - Updated Apr 5, 2017 at 8:03PM

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The company did warn about an iffy Q4, but there are positives on the horizon.

Ciena (NASDAQ:CIEN) reports its fiscal year-end 2008 results tomorrow morning -- and investors are nervous. BWS Financial just downgraded rival Juniper Networks (NASDAQ:JNPR) on concerns that major telcos like AT&T (NYSE:T) are slashing their capital expenditure budgets. If a major player like Juniper goes down, can Ciena be far behind? And what does this mean for the rest of the industry -- Cisco (NASDAQ:CSCO), Nortel (NYSE:NT), and Alcatel-Lucent (NYSE:ALU)?

What analysts say:

  • Buy, sell, or waffle? Eighteen analysts are feeling just as skittish as the rest of us. They give the stock a total of six buy ratings, versus nine holds and three sells.
  • Revenue. On average, they're looking for quarterly sales to drop 8% to $198.9 million ...
  • Earnings. ... while profits practically evaporate, falling 90% to just a nickel a share.

What management says:
Don't say you weren't warned. Ciena told us (last quarter) that the fourth quarter could be hairy. More to the point, CEO Gary Smith warned that: "sales cycles are lengthening and some deployments are slowing" among Ciena customers. Yet as recently as three months ago, Ciena had still "seen no project or order cancellations." To the contrary, Ciena was picked to help Cisco build the Global Sprint (NYSE:S) Tier 1 IP Network.

Unless something has changed, and tomorrow's news contains something truly unexpected, it should be no worse than we were promised three months ago.

What management does:
Nor do I see anything particularly frightening in the margin trends at Ciena. The rolling gross is still moving upwards. On the other hand, operating and net margins are dropping ...

Margins

4/07

7/07

10/07

1/08

4/08

7/08

Gross

44.7%

45%

46.5%

48.1%

50.6%

51%

Operating

1.7%

3.5%

5.6%

6.2%

9.5%

8.8%

Net

4.9%

9%

10.6%

11.9%

12.5%

10.1%

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:
... which is not great news, but it's not cause for panic, either.

As far as the slip in operating margins goes -- I couldn't care less. Actually, I'm thrilled to see the operating margin drop, because I know why it happened. Last quarter, Ciena hiked its R&D spending by more than 50% year over year. Did it hurt profits? Sure. But investors should be much more willing to see Ciena take a short-term hit on its income statement, than to learn that management skimped on necessary research and development in order to juice its bottom line a bit.

The decline in the net income is another matter. To get the full skinny, you really want to read Ciena's July 18th SEC filing, but I'll sum it up here:

  • The bad news is that Ciena made some dumb investments in structured investment vehicles (SIVs); those investments are heading south, and they're taking Ciena's profits with 'em.
  • The good news is that Ciena's stake in the SIVs in question was only worth $25.6 million. That's as much as Ciena can lose from this gaffe, and the company already wrote off about $5 million last quarter. Eventually, the bleeding will stop.

Whether it stops sooner or later, we should learn tomorrow.

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

Sprint Nextel is a Motley Fool Inside Value pick. Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Ciena Corporation Stock Quote
Ciena Corporation
CIEN
$55.17 (0.86%) $0.47
Sprint Corporation Stock Quote
Sprint Corporation
S
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.39 (0.66%) $0.12
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$46.59 (-0.04%) $0.02
Juniper Networks, Inc. Stock Quote
Juniper Networks, Inc.
JNPR
$29.04 (0.45%) $0.13

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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