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Ciena: Downgraded But Not Out


Examining tech firm's conference call.

In the "it never fails" category I can now add the words I uttered on Friday regarding Ciena (CIEN): "No details on CIEN yet, but just by the headlines I am confident in saying this: these results are way above what the sellside feared after the last call. Watch for upgrades and estimate bumps sooner than later." Like a Swiss watch, this morning JMP Securities and Piper Jaffray downgraded CIEN based on "peak margins and decelerating Y/Y growth rates." 'Nuff said.
Now for the nitty gritty from the call:
  • Last quarter's guidance of 20% revenue growth for the year – which had deeply disappointed analysts – was bumped to 23%. Add to it the revenues from the World Wide Packet (WWP) acquisition, and guidance jumped to 27%. Yes, revenue growth this year will be down from last year's 38%, but that's a problem when a stock is trading at 50x earnings, not so much at 15x.
  • For a company like CIEN, where sales are in large chunks to relatively few customers, there is always the risk that bad mix will hurt margins in any given quarter. And CIEN's integration of software heavy WWP products could stumble, but I don't see how one can come to the conclusion that margins have peaked. If anything, on the call management made a decent case that the margin range should continue to trend up.
  • While different customers are at different stages of converged Ethernet deployment, overall the migration toward Ethernet is in the early stages, and I am leaning on the side that carriers are still underestimating the impending need for capacity additional capacity.
  • A win at Verizon (VZ) for sales of the CoreDirector product is not in the numbers. Perhaps, that's because folks believe AlcaLu (ALU) will win, but, nonetheless, the possibility of a win is there, and if it happens it could dovetail into some meaningful 4200 product sales, especially considering that the WWP software should allow for much smoother interaction between the two products.
  • Is anything bad about the CIEN story? Sure, moribund Sprint (S) is one of its primary customers, and CIEN still relies very heavily on sales to AT&T (T), hence "concentration" risk. Also, if the economy goes over the cliff it will eventually catch on to CIEN as well. And we are in bear market, where multiple compression is the name of the game.
  • That said, CIEN remains at historically cheap valuations any way you slice it: Enterprise Value / Sales, P/E, and Price/Book. The company noted that it as it continues to remain profitable. It will revive tax assets that will allow it not to pay meaningful cash taxes for many many years. In my humble opinion we are in the early innings of figuring out how to flood the Web with content, which means that CIEN's business has some major sustained tailwinds.
  • And I'll note that Merrill Lynch (MER) did up estimates and the body language from Mother Morgan (MS) is that it'll likely do the same.
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Position in CIEN.
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