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Shares of Ciena Corp (CIEN - Analyst Report) plunged 7.0% ($1.59) to close at $21.31 on Thursday, Dec 12, 2013, after the telecom equipment maker reported mixed fourth-quarter results and gave cautious first-quarter outlook.

Ciena reported earnings of 16 cents per share (excluding share-based compensation and other one-time items), much better than year-ago loss of 7 cents per share.

However, deducting share-based compensation; earnings were actually 8 cents per share, which missed the Zacks Consensus Estimate by 9 cents.

The company also announced that it is shifting listing from Nasdaq to NYSE, effective Dec 23.

Revenues

Revenues jumped 25.3% year over year and 8.4% sequentially to $583.4 million, which comfortably surpassed the Zacks Consensus Estimate of $569.0 million. Revenues also beat management’s guided range of $550.0 million to $580.0 million.
 
Product revenues (81.7% of revenues) surged 31.2% from the year-ago quarter and 8.9% quarter over quarter to $476.4 million. Services revenues (18.3% of revenues) increased 4.5% year over year and 6.0% sequentially to $107.0 million.

Converged Packet Optical revenues (60.2% of revenues) surged 47.4% year over year and 16.2% quarter over quarter to $350.9 million. Packet Networking (10.5% of revenues) increased 29.4% from the year-ago quarter but declined 0.6% sequentially to $61.2 million.

Optical Transport revenues (9.0% of revenues) declined 26.7% year over year and 20.5% quarter over quarter to $52.6 million. Software and services revenues (20.3% of revenues) increased 9.6% from the year-ago quarter and 9.3% from the previous quarter to $118.7 million.

United States contributed 55.9% of the revenues, while international customers contributed 44.1% in the last quarter. One 10.0% plus customer represented 16.5% of the revenues in the reported quarter.

At the end of fiscal 2013, backlog increased approximately 12.0% year over year to more than $1.0 billion. Revenues jumped 14.0% over fiscal 2012 to $2.1 billion. The company signed a partnership agreement with Vodafone plc (VOD - Analyst Report) during the year.

Operating Results

Gross margins contracted 190 basis points (bps) on a year-over-year basis and 280 bps sequentially to 40.8% due to unfavorable customer and product mix. Including share-based compensation, gross margin declined 180 bps from the year-ago quarter and 280 bps sequentially to 40.6%.

Operating expense as a percentage of revenues (excluding share-based compensation) declined 510 bps from the year-ago quarter but increased 70 bps from the previous quarter to 36.1%.
 
Including share-based compensation, operating expenses plunged 530 bps on a year-over-year basis but increased 60 bps on a sequential basis to 37.6%.

The year-over-year decline was primarily driven by a lower research & development expense (down 340 bps), selling & marketing expense (down 90 bps) and general & administrative expense (down 100 bps).

However, the sequential growth in operating expense was primarily due to a higher selling & marketing expense (up 100 bps). Strong order flow led to higher variable compensation in the quarter, which increased selling & marketing expense.

Research & development expense was also higher than expected (down only 10 bps on a sequential basis) due to previous deferrals, which were accounted for in the quarter. General & administrative expense declined 60 bps on a sequential basis.

As a result of lower operating expense, Ciena reported operating income (including share-based compensation) of $17.8 million compared with a year-ago quarter loss of $2.0 million. Operating income declined 48.1% on a sequential basis due to lower gross margin base and higher operating expenses.

Interest expense of $10.9 million increased 1.0% year over year but remained almost flat on a sequential basis.

Ciena reported net income of $18.3 million or 16 cents per share compared with loss of $6.67 million or 7 cents per share in the year-ago quarter. Net income and earnings per share were also lower than $26.2 million or 23 cents per share reported in the previous quarter.

Balance Sheet

At the end of the fourth quarter of 2013, cash and cash equivalent (including short-term and long-term investments) was $486.5 million. Cash flow from operations was $3.6 million in the quarter.

Guidance

Ciena forecasts revenues to be in the range of $515.0 million to $545.0 million for the first quarter of fiscal 2014. Although the outlook is much better than $453.1 million in the year-ago first quarter, revenues are expected to decline on a sequential basis.

The Zacks Research Estimate is currently pegged at $531.0 million, slightly higher than the mid-point of the company’s guidance range.

Adjusted gross margin (excluding one-time operating items) is projected to be at the lower range of 40%, which is higher than the fourth-quarter result but lower than 44.6% reported in the year-ago quarter.

Ciena expects adjusted operating expense of approximately $205.0 million per quarter through fiscal 2014. This translates into approximately 6.0% year-over-year growth from $775.0 million reported in fiscal 2013.

However, management expects operating expense to grow at a lower rate than revenue growth. This will help the company to achieve the lower end of its targeted adjusted operating margin growth range of 7.0% to 10.0%. Ciena reported adjusted operating margin of 5.6% in fiscal 2013.

Our Take

Ciena provided cautious first-quarter revenue guidance and order growth is also expected to be sluggish compared to the remainder of the fiscal year. We believe that this may remain an overhang on the stock in the near term.

Moreover, higher operating expenses remain a concern. Although Ciena expects to improve its operating leverage, we believe that any decline in top-line growth particularly due to stiff competition from Cisco (CSCO - Analyst Report) and Alcatel-Lucent S.A (ALU - Analyst Report) will negatively impact profitability, going forward.

Nevertheless, we believe that increasing spending on optical upgrades and higher number of orders from international customers will boost top-line growth in fiscal 2014. Moreover, the company’s Tier 1 contract wins and strong backlog are expected to boost near-term results.

Currently, Ciena has a Zacks Rank #3 (Hold).

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