Ciena Rises as Telecom Index Recovers

We have a neutral rating on Ciena Corp. (CIEN - Analyst Report), as the company's FlexSelect platform has been gaining momentum. It allows carriers to transition networks to carrier grade Ethernet. We believe the acquisition of World Wide Packets will further strengthen its base.

The provider of optical networking equipment, software and services diversified beyond emerging carriers, and now counts the world's largest telecom service providers as its customers, including Verizon (VZ - Analyst Report), AT&T (T - Analyst Report), BT Group (BT - Snapshot Report) and Qwest Communications (Q).

Ciena's cost cutting efforts will trim operating expenses, helping it achieve breakeven results in the coming quarters.

Moreover, the company has a healthy balance sheet with improving cash metrics. The company exited the current quarter with $922.6 million in cash and short-term investments, compared to $917.0 million in the previous quarter. Long-term debt (convertible notes payable) at the end of the quarter remained at $798.0 million.

However, the company's sales cycle is lengthening, as Tier 1 carriers proceed with caution, given the economic uncertainty. Moreover, the telecommunications market is full of competitors, such as Alcatel-Lucent (ALU - Analyst Report), Cisco (CSCO - Analyst Report), Ericsson (ERIC - Analyst Report), Nokia Corp. (NOK - Analyst Report), Nortel Networks (NT) and Tellabs (TLAB - Analyst Report), which are premier companies in the telecommunication space posing a threat to Ciena.

Shares of Ciena, surged 2.5% to $13.53 in after-hours trading yesterday and closed at $13.20, a rise of 3.04%. In our view, the sharp increase in price is due to a recovery in the telecommunications sector.

Among key industry indexes, the Dow Jones U.S. Fixed Line Telecommunications Total Stock Market Index increased 0.8% to 904 points, while the Dow Jones U.S. Telecommunications Equipment Total Stock Market Index increased 1.1% to 5,169 points yesterday.

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