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Ciena's Growth Story

By flow from operations is accelerating. In the last nine months over $97 mln has been produced, with $64 mln coming in the last quarter.

First, let's talk Ciena's (CIEN) EPS results. The company reported 41 cents versus 30 cents consensus as reported by Briefing. Now that is a beat. YoY that's EPS growth of 192% versus the 14 cents last year. For the next quarter CIEN is expecting results to be "roughly flat" versus prior quarter, so call it another 41 cents versus 32 cents consensus. That is surprisingly strong guidance for EPS, and an even more surprising sell-off reaction to the stock yesterday.

Stock could have experienced a sell the news reaction but I also noted a negative analyst comment referencing slowing revenue growth. Hey, if 37% annual revenue growth for the year is slowing I'll take that all day long. Especially in a sector where very few, if any companies with a similar revenue base have that kind of growth. Frankly, I don't know of a company in the networking or fiber optics sector doing a billion or more in revenue with anything close to CIEN's growth rate.

In addition, cash flow from operations is accelerating. In the last nine months over $97 mln has been produced, with $64 mln coming in the last quarter. This improves an already very strong balance sheet.

Upgrade cycle in an industry that is still just possibly beginning, combined with CIEN's targeted strategic growth initiatives, could keep propelling CIEN for quarters to come.

As noted by an analyst on the call, industry bandwidth demand is possibly constrained. My take is that it's more constrained than most pundits currently think. The confusion here is understandable if you look at the results of Alcatel-Lucent (ALU). However, if you look at the results from companies with the "hot" networking products – like Cisco (CSCO), Juniper Networks (JNPR), CIEN and Harmonics (HLIT), my previous comments on a bandwidth constrained world seem well-supported. End user demand for bandwidth is set to ramp from many avenues, but just the increased load from the new gaming platforms (Halo 3 launch), and massive increases in HDTV content over IP will cause materially higher loads on many networks. (Note: this CIEN call has me thinking I may need to turn up the dial on my moderately bullish view of Akamai (AKAM)).

Management did talk about the fact that results on a quarterly basis can be lumpy and this has always been true in the telecom equipment space. Giving conservative guidance is very much in vogue these days in the tech sector and I suspect CIEN is no exception. However, CIEN calling for such a strong EPS result next quarter makes me think that the analysts will need to boost numbers and some upgrades may be in the offing. Lastly, there is a lot of room for upgrades. Of the 23 analysts that cover CIEN, 11 have hold ratings and one has a sell rating. This implies there are a lot of bullets in the guns of the analysts here.

I believe we will continue to be in a landscape where growth stocks outperform value and tech will be an area of growth stock leadership. Given this scenario, the current earnings and price target estimates for CIEN could prove to be quite conservative.
Positions in CIEN, HLIT and AKAM.

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