Ciena: An Undervalued Play On Near-Term Recovery And Long-Term Growth Potential
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It has been a rough period for optical suppliers, as reduced spending from telco service providers like AT&T (T) and Verizon (VZ) has led to weaker demand for Ciena (CIEN), as well as peers and rivals like Cisco (CSCO), Infinera (INFN), and Juniper (JNPR).
That said, Ciena has likely seen the worst of this cyclical slowdown, as book-to-bill has climbed back above 1.0 and orders should translate to stronger revenue in the second half of the year. Beyond the near-term recovery, there are also opportunities for Ciena to displace Huawei with European and Asian customers and gain market share in new metro/edge applications.
Bearing this in mind, Ciena should trade closer to $62 today, with longer-term annual return potential in the high single-digits to low double-digits as the company executes on market expansion opportunities.
Better Fiscal Q1 Results, But Not Meaningfully So
Ciena posted fiscal first quarter results that were ahead of Street expectations, but the significance of the outperformance is low. Revenue declined 9% year-over-year and almost 9% quarter-over-quarter (to $757 million), beating expectations by 1%, while gross margin landed in-line with expectations at 48% (up about three basis points year-over-year). Operating income rose 2% year-over-year and operating margin of 14.6% (up 150 basis points) was two points better than expected. However, with the company pushing some expenses out into the second quarter, it doesn’t net out to any meaningful change in outlook.
It was a tough quarter overall. Like Infinera, Ciena saw better results in the international segment. That said, this was the weakest quarter for the North American business since the first quarter of 2019.
Service provider revenue fell 15% year-over-year, while cable provider revenue fell 35% year-over-year, and that’s a difficult headwind to overcome. Webscale performance was also soft. The business grew 25% year-over-year against a weak comp, but declined 14% quarter-over-quarter, and management only guided for mid-single-digit growth for the year.
As far as bright spots go, though, cable provider revenue did improve more than 12% quarter-over-quarter. Additionally, the book-to-bill did turn positive for the first time in a year, and management continues to expect stronger 800G deployments in the second half of the year. The company also continues to see strong interest for its WaveLogic 5 Extreme, with initial customer adds running double the rate of the prior WaveLogic Ai.
Growth Opportunities Beyond 2021
One of the most attractive parts of the Ciena story is the company’s opportunity to displace Huawei in the service provider market, as multiple countries in Europe and Asia have banned further use of Huawei’s optical equipment.