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Ciena Corporation (CIEN - Analyst Report) reported fiscal third-quarter 2013 earnings (including stock based compensation) of 16 cents per share, better than the Zacks Consensus Estimate of 10 cents per share.

Revenues

Revenues for the quarter increased 13.6% year over year to $538.4 million, within management’s guided range of $515.0 million and $545.0 million. Reported revenues also beat the Zacks Consensus Estimate of $535.0 million.

Product revenues, which accounted for 81.3% of total revenue, increased 17.1% from the year-ago quarter to $437.4 million. Services revenues, which comprised 18.7% of total revenue, increased 0.2% year over year to $100.9 million.

Ciena witnessed continuous growth in demand from key markets, such as mobile data, business services and app-driven machine-to-machine connectivity. Moreover, the company’s business strategy and steadily improving performance across its end markets helped the top line in the quarter.

Margins

Ciena reported non-GAAP gross profit of $228.2 million, which increased 25.9% from the year-ago quarter. Gross margin expanded 420 basis points (bps) on a year-over-year basis to 42.4% due to favorable product mix. Including share-based compensation, gross profit came in at $233.6 million while margins came in at 43.4%.

Operating expenses on a non-GAAP basis increased 9.7% year over year to $199.2 million, primarily due to an increase in research and development, selling and marketing and general and administrative expenses. Excluding share-based compensation, operating expenses came in at $190.4 million.

Ciena reported operating profit of $34.4 million, compared with $5.1 million in the year-ago quarter. Net income on a non-GAAP basis was $26.2 million, up from a loss of $4.2 million in the year-ago quarter.

Ciena exited the quarter with $478.2 million in cash and cash equivalents versus $356.5 million in the previous quarter. During the quarter, cash flow from operations was $42.0 million.

Outlook

Ciena expects fiscal fourth-quarter 2013 revenues to range between $550 to $580 million,. Adjusted gross margin (excluding one-time operating items) is projected to be in the lower 40.0% range, while adjusted operating expenses are expected to be in the high $190 million range.

Our Take

We believe that increasing spending on optical upgrades and demand from customers will help the company to counter sluggish macroeconomic conditions. Moreover, the company’s Tier 1 contract wins and strong order flow are expected to provide a significant competitive edge over its peers going forward. Additionally, an expanding customer base will boost the top line in the near term.

However, fluctuation in operating expenses, due to project ramp ups, is likely to hurt margins. Although we believe that increasing spending on optical upgrades will help the company to counter sluggish macroeconomic conditions over the long term, the company may lose market share due to stiff competition from Cisco Systems (CSCO - Analyst Report), Alcatel-Lucent S.A (ALU - Analyst Report) and Ericsson (ERIC - Analyst Report).

Ciena has a Zacks Rank #3 (Hold).

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