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Telecommunications network specialist Ciena Corp. (CIEN - Analyst Report) reported a loss of 4 cents per share in third quarter 2012, much better that the Zacks Consensus Estimate of a loss of 13 cents. The company’s top-line was also ahead of the Zacks Consensus Estimate of $473.0 million.

Quarter Details

Total revenue increased 8.9% year over year to $474.1 million, which was within management’s guided range of $455.0 million to $485.0 million, driven by higher demand during the quarter.

Product revenue, which accounted for 78.8% of the total revenue, increased 6.7% from the year-ago quarter to $373.4 million. Services revenue, which contributed 21.2% to the total revenue, jumped 18.1% year over year to $100.7 million.

Adjusted gross profit (including stock based compensation) was down 2.1% year over year to $186.7 million in the quarter. Gross margin contracted 440 basis points (bps) to 39.5%, primarily due to unfavorable product mix.

Operating expenses (including stock based compensation) were down 1.0% year over year to $181.6 million. This decline was primarily due to a 5.3% year-over-year decrease in research and development expenses and a 1.1% decline in general and administrative expenses.

However, selling and marketing expenses were up 5.7% on a year-over-year basis. Operating expenses as a percentage of revenue contracted 380 bps during the quarter.

Ciena reported adjusted operating income (including stock-based compensation) of $5.1 million, down from $7.4 million in the year-ago quarter. Interest expense during the quarter was $9.6 million compared with $9.5 million in the year-ago quarter.

Non-GAAP net loss for the quarter was $4.1 million or a loss of 4 cents per share, which worsened from the year-ago net profit of $8.3 million or 8 cents a share. However, including stock based compensation, net loss for the quarter came at $10.9 million or a loss of 11 cents per share.    

Ciena exited the quarter with $617.2 million in cash and cash equivalents, down from $635.7 million in the previous quarter. The company had $23.1 million in cash from operations versus $73.4 million in the previous quarter. Free cash flow was $6.3 million.

Guidance

Ciena expects fourth quarter 2012 revenues in the range of $455.0 million to $480.0 million. Adjusted gross margin is projected to be at 40%, consistent with the company’s near-term expectation. Management expects adjusted operating expenses to be around low $180 million range.

Our Recommendation

Ciena reported a dismal quarter due to sluggish macroeconomic environment and slower-than-expected product ramp up and provided a tepid outlook. Moreover, competition from Cisco Systems Inc. (CSCO - Analyst Report) and Alcatel-Lucent S.A (ALU - Analyst Report) are the potential headwinds for the company.

However, we anticipate a recovery based on favorable operational execution, strong product pipeline and new deal wins from Tier 1 service providers. These are expected to lead to a gradual improvement in results in 2012.

We have a long-term Neutral recommendation on Ciena, with a Zacks #1 Rank, implying a short-term Strong Buy rating.

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