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We recently upgraded our recommendation on Ciena Corp. (CIEN - Analyst Report) from Neutral to Outperform following the better-than-expected third quarter results.

In the third quarter of 2012, Ciena’s top line ($474.1 million) increased 8.9% on a year-over-year basis and was also ahead of the Zacks Consensus Estimate of $473.0 million driven by robust demand for its products. 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.

Though, Ciena reported a loss per share of 11 cents, it was lower than the Zacks Consensus Estimates of a loss of 13 cents per share. Going forward, Ciena’s cost-cutting initiatives are expected to drive its bottom-line growth. This is reflected in the 11.4% decline in its operating expenses in the first nine months of fiscal 2012 from the comparable period last year. Moreover, operating expenses as a percentage of revenue was down from 51.8% to 43.1% over the same period of time.

Ciena has been ramping up its product portfolio. The new product offerings beyond its core optical networking expertise has expanded its customer base and grown its addressable market. Ciena’s revenues are benefiting from growth in most of its business segments. Revenue has been benefited by the strong demand for Packet-Optical transport and switching products, integrated network and service management software

In the nine months of fiscal 2012, the company has reported a 6.9% year-over-year increase in its Packet-Optical transport revenue, 4.7% year over year increase in its Packet-Optical Switching revenue and 13.7% increase in its revenue from software and services segment. These revenue improvements also helped to offset the decline in Carrier-Ethernet Solutions revenue (down 15.3% year over year) over the same period of time.

We believe that pent-up demand for Ciena’s products will boost the top-line going forward. Moreover, we expect multi-year optical upgrades to act as a positive catalyst for the company over the long term. We believe that increasing spending on optical upgrades will help the company to counter sluggish macroeconomic conditions going forward.

Moreover, we anticipate a continuing recovery based on favorable operational execution, strong product pipeline and new deal wins from Tier 1 service providers. However, unfavorable product mix and competition from Alcatel-Lucent, S.A. (ALU - Analyst Report), Cisco Systems, Inc. (CSCO - Analyst Report) and Ericsson (ERIC - Analyst Report) remains a concern in the short term.

Currently, Ciena has a Zacks #3 Rank, which implies a Hold rating in the short term.

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