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Ciena Corp (CIEN - Analyst Report) reported first-quarter 2013 non-GAAP earnings per share of 12 cents per share, much better than the previous-year loss per share of 17 cents. Including share-based compensation, earnings came in at 4 cents, outpacing the Zacks Consensus Estimate of a loss of 25 cents per share. The year-over-year improvement was on the back of higher revenues and lower-than-expected operating expenses.

Revenues

Revenues for the quarter increased 8.7% year over year to $453.1 million and was within management’s guided range of $435 million and $460 million. Moreover, reported revenues also surpassed the Zacks Consensus Estimate of $450 million. However, sequentially, revenues were down a modest 2.7%.

Product revenues, which accounted for 78.0% of the total revenue, increased 5.8% from the year-ago quarter to $353.1 million. Services revenue, which contributed 22.0% to the total revenue, jumped 20.5% year over year to $100 million.

Operating Results

Ciena reported adjusted non-GAAP gross profit of $202.2 million, which increased 15.9% from the year-ago quarter. Gross margins expanded 270 basis points on a year-over-year basis to 44.6% due to favorable product mix. Including share based compensation, gross profit came in at $201.2 million while margins came in at 44.4%.

Operating expenses on a non-GAAP basis increased marginally, up 0.7% year over year, to $176.6 million. Including share-based compensation; operating expenses came in at $183.9 million.

Lower-than-expected operating expenses led to Ciena’s improvement in operating results. Ciena reported non-GAAP operating profit of $25.6 million, which was up from an operating loss of $0.9 million in the year-ago quarter.

Net Income on non-GAAP basis increased from a loss of $16.5 million reported in the previous year quarter to a profit of $12.3 million. Including share-based compensation, net income came in at $4.3 million.

Balance Sheet

Ciena exited the quarter with $552.2 million in cash and cash equivalents versus $642.4 million in the previous quarter. During the quarter, company had used $45.7 million in operating activities.

Guidance

Ciena expects second quarter 2013 revenue to range between $465 million and $495 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 be around $190 million.

Recommendation

Ciena posted a surprise profit after five quarters and had provided positive top-line guidance. Moreover, the company’s Tier-1 contract wins and strong order inflow is expected to boost the company’s near-term results.

However, fluctuation in operating expenses, due to project ramp ups, is likely to hurt margins. 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 (CSCO - Analyst Report), Alcatel-Lucent S.A (ALU - Analyst Report) and Ericsson (ERIC - Analyst Report).

Currently, Ciena has a Zacks Rank #3 (Hold).

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