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Ciena Corp (CIEN - Analyst Report) reported a loss of 16 cents per share (including stock based compensation) that widened from the Zacks Consensus Estimate of a loss of 14 cents and was much worse than the 7 cents loss reported in the year-ago quarter.

Quarter Details

Total revenue increased 2.2% year over year to $465.5 million, which was within management’s guided range of $455.0 million to $480.0 million, but missed the Zacks Consensus Estimate of $470 million. The quarterly revenues edged up on the back of higher demand for Ciena’s services.

Product revenue, which accounted for 78.0% of the total revenue, slipped 1.3% from the year-ago quarter to $363.2 million. Services revenue, which contributed 22.0% to the total revenue, jumped 17.2% year over year to $102.4 million.

Adjusted gross profit (including stock based compensation) inched up 1.0% year over year to $197.6 million in the quarter. Gross margin contracted 60 basis points (bps) on a year on year basis to 42.4%, primarily due to unfavorable product mix. However, gross margin exceeded management’s guidance of 40.0% primarily due to robust performance of the Carrier Ethernet Solutions software and service.

Operating expenses (including stock based compensation) were up 5.2% year over year to $199.7 million and as a percentage of revenue expanded 120 bps during the quarter. The year-over-year upside was primarily attributed to a 5.0% increase in research and development expenses coupled with 4.0% rise in selling and marketing expenses and 9.2% jump in general and administrative expenses. Moreover, restructuring costs went up from $0.6 million in the year-ago quarter to $1.9 million.

The sharp rise in expenses dragged down profitability in the quarter. Ciena reported an operating loss (including stock based compensation) of $2 million compared with a profit of $6 million in the year-ago quarter.

Non-GAAP net loss (excluding stock based compensation) for the quarter was $6.7 million or 7 cents per share, which worsened from the year-ago net profit of $3.3 million or 3 cents per share. Including stock based compensation, net loss came at $15.5 million.

Ciena exited the quarter with $642.4 million in cash and cash equivalents, up from $617.2 million in the previous quarter. The company had $10.6 million in cash from operations versus $23.1 million in the previous quarter.

Guidance

Ciena expects fiscal first quarter 2013 revenue to range between $435 million and $460 million. Adjusted gross margin (excluding one-time operating items) is projected to be at the lower range of 40%, while adjusted operating expenses is expected to remain in the high $180 million range. Ciena expects to incur restructuring expenses in the range of $3 million to $5 million.

Ciena expects a tepid first quarter due to reductions in order volume and deployment activity owing to the holiday season. For 2013 management remains optimistic and expects to gain market share driven by continued spending from telecom carriers, who remain focused on upgrading their networks. Moreover, favorable product mix is expected to expand top-line growth in 2013. However, management hinted at subdued gross margins due to startup costs related to new orders and its deployments.

Recommendation

Ciena continues to disappoint with its inconsistent execution as losses widened in fiscal 2012. The company provided a dismal first quarter outlook, although revenue is expected to increase in the range of 4.4% to 10.4% on a year-over-year basis.

However, gross margin is forecasted to contract approximately 190 bps, while operating expenses are expected to increase approximately 3.0% year-over-year, which may hurt profitability in the first quarter. Currently, the Zacks Consensus Estimate is pegged at a loss of 9 cents per share.

Although we believe that increasing spending on optical upgrades will help the company to counter sluggish macroeconomic conditions over the long term, the company may lose market share due to stiff competition from Cisco Systems Inc. (CSCO - Analyst Report) and Alcatel-Lucent S.A (ALU - Analyst Report).

Currently Ciena has a Zacks #4 Rank (Sell).

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