Ciena Beats but Guides Flat

Ciena Corporation (CIEN - Analyst Report) announced better-than-expected results for the third quarter ended July 31 amid cautious consumer spending and weak demand. However, the more stable macro economic environment helped it deliver sequential growth, although year over year comparisons have been weak.

Revenue of $164.8 million was down 34.9% year over year but increased 14.4% sequentially and beat the Zacks Consensus estimate of $156.0 million. Revenue for the quarter included $139.9 million in product revenue, which was down 37.4% from the year-ago period, and $24.9 million in services revenue, down 15.8% year over year.

Ciena narrowed its non-GAAP (excluding one-time and non-cash items) net loss for the quarter to 5 cents from a net loss of 25 cents in the previous quarter. This was, however, down from the year-ago period of a net income of 37 cents, but beat the Zacks Consensus estimate of a 21 cent net loss.

The growth in the quarter was driven by improvement in its Optical Service Delivery and Carrier Ethernet Service Delivery products. Sales to international customers represented 37.0% of total revenue in the quarter. The company had three 10.0%-plus customers in the quarter, representing 37.0% of total sales. Ciena’s customers include large tier 1 phone companies such as AT&T (T - Analyst Report), Verizon Communications (VZ - Analyst Report) and Sprint Nextel (S - Analyst Report).

Adjusted (non-GAAP) gross margin in the quarter was 46.0% versus 52.0% in the year-ago quarter and 43.0% in the previous quarter. The company demonstrated excellent operational execution in the quarter ,and focus on its cost-cutting initiatives helped Ciena lower operating expenses by 15.6% from the year-ago period and 8.5% from last quarter. Operating margin for the quarter was -2.0% versus 15.0% last year and -17.0% in the last quarter.

Cash generation was strong in the quarter as the company generated $3.5 million in cash from operations versus $2.9 million cash used in the previous quarter. Ciena exited the quarter with $1.06 billion in cash, and short-term investments. Long-term debt (convertible notes payable) remained at $798.0 million.

Though market conditions have improved, Ciena expects results to continue to be lumpy as customers are still spending cautiously. As a result, the company guided revenue in the fourth quarter to be flat sequentially. Non-GAAP operating expenses for the fourth quarter are expected to be in the low-to-mid $80.0 million range.

The company expects higher prototype costs in the coming quarter. While pricing remains competitive, the company expects to sustain gross margins in the mid-to-high 40% range in the near term.

Ciena’s restructuring initiatives to trim operating expenses seem positive for the company. Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2010 due to favorable operational execution and growth in data traffic.

Intense competition from larger rivals such as Cisco (CSCO - Analyst Report), Alcatel-Lucent (ALU - Analyst Report), Juniper (JNPR - Analyst Report) and Tellabs (TLAB - Analyst Report) are eating into Ciena’s market share. Thus we maintain our neutral rating on Ciena’s shares.

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