Ciena Corp. (CIEN) reported fiscal fourth-quarter 2014 loss of 16 cents per share (excluding share-based compensation and other one-time items) as against the Zacks Consensus Estimate of earnings of 5 cents and the year-ago earnings of 8 cents per share.
Shares of Ciena were up 6.96% ($1.18) and closed at $18.14 on Dec 11, 2014 following the earnings release. We believe that shares prices increased in spite of the company missing earnings estimates on account of the 2015 growth roadmap provided by Ciena’s management.
Revenues
Revenues jumped 1.3% year over year to $591 million, which beat the Zacks Consensus Estimate of $589 million. Revenues also beat the mid-point of management’s guided range of $570 to $610 million.
Product revenues (80.6% of revenues) remained flat on a year-over-year basis at $476 million. Services revenues (19.4% of revenues) climbed 7.3% year over year to $114.8 million.
Converged Packet Optical revenues (64.9% of total revenues) surged 9.2% year over year to $383.3 million. Packet Networking (9.5% of total revenues) declined 7.8% from the year-ago quarter to $56.4 million. Optical Transport revenues (4.9% of total revenues) declined 49.6% year over year to $26.5 million. Software and services revenues (21.1% of total revenues) increased 5.1% from the year-ago quarter to $124.8 million.
United States contributed 52.2% of the revenues, while international customers contributed 47.8% in the last quarter. One customer represented 12.2% of the revenues. AT&T and Verizon (VZ) were two of Ciena’s top carrier customers in the quarter.
Operating Results
Gross margin (Including share-based compensation) contracted 290 basis points (bps) on a year-over-year basis to 37.7% due to unfavorable customer and product mix.
Operating expense, as a percentage of revenues (including share-based compensation), declined 180 bps from the year-ago quarter to 35.8%. The year-over-year decline was primarily due to lower research & development (down 50 bps) and selling & marketing (down 70 bps) expenses.
Ciena reported operating income (including share-based compensation) of $11.6 million compared with $17.8 million reported in the year-ago quarter.
Ciena reported net loss of $16.9 million or 16 cents per share compared to earnings of $8.5 million or 7 cents per share in the year-ago quarter. The net loss was primarily due to the huge interest expenses borne by the company in the reported quarter.
Balance Sheet
At the end of the fourth quarter of fiscal l2014, cash and cash equivalents (including short-term and long-term investments) were $726.9 million compared with $532.9 million in the previous quarter. Cash flow from operations was $73.8 million compared with $16 million in the prior quarter.
Guidance
Ciena forecasts revenues in the range of $540 to $570 million for the first quarter of fiscal 2015. The Zacks Consensus Estimate is currently pegged at $568 million, higher than the mid-point of the company’s guidance range.
Adjusted gross margin (excluding one-time operating items) is projected to be in the low 40s percentage range. Ciena expects adjusted operating expense of approximately $210 million for the first quarter.
Our Take
We believe increasing spending on optical upgrades and higher number of orders from international customers will boost Ciena’s top line in fiscal 2015 and beyond. Moreover, the company’s Tier 1 contract wins and strong backlog are expected to boost near-term results.
Additionally, the diversification of customer base and expansion of the addressable market will be a major growth driver going forward.
Ciena recently scored a large number of wins at telecommunications companies (primarily AT&T) and several international players. The agreement with AT&T requires Ciena to provide customary concessions in the initial phase, which, in turn will adversely impact its margins in the near term. Also, initial deployment costs are usually higher because they include the cost of hardware, so the other wins will also have an impact on its near-term margins. However the wins will no doubt be beneficial in the long run, helping to generate more business and thus improve its profitability.
Ciena’s highly leveraged balance sheet may also adversely affect its profitability going forward. Moreover, we believe that any decline in the top line, particularly due to stiff competition from Cisco (CSCO), Juniper Networks (JNPR) and Alcatel-Lucent S.A will negatively impact profitability.
Currently, Ciena has a Zacks Rank #5 (Strong Sell).
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