Ciena has fiscal 3Q14 good news, 4Q14 not so good news

Optical transport systems and Ethernet switch vendor Ciena Corp. (NYSE:CIEN) reported good news for fiscal 2014, including both strong revenues and achievement of Domain 2.0 status at prime customer AT&T. However, it’s the not so good news about its fourth quarter outlook that has Wall Street’s attention.

Optical transport systems and Ethernet switch vendor Ciena Corp. (NYSE:CIEN) reported good news for fiscal 2014, including both strong revenues and achievement of Domain 2.0 status at prime customer AT&T. However, it’s the not so good news about its fourth quarter outlook that has Wall Street’s attention.

The company reported revenue of $603.6 million, for its fiscal third quarter ended July 31, 2014, well above the $538.4 million it earned in the third quarter of 2013 and the $560 million it achieved in this fiscal year’s second quarter (see "Ciena 2Q14 results, 3Q14 guidance counters jitters"). The results fell within its forecast and slightly exceeded analyst estimates.

The strong revenue stream naturally had a positive effect on the bottom line. Ciena reported GAAP net income of $16.2 million ($0.15 per diluted common share), which again trumped the year-ago quarter, when the company suffered a GAAP net loss of $1.2 million ($0.01 per diluted common share). The profit represented sequential improvement; the company reported a GAAP net loss of $10.2 million ($0.10 per common share) in the previous quarter.

Non-GAAP net income for the recently concluded quarter was $40.9 million ($0.32 per diluted common share), versus 3Q13’s $26.2 million ($0.23 per diluted common share).

GAAP gross margin was 43.7% against last year’s 42.4%. Non-GAAP gross margin came in at 44.3%, while the same figure for 3Q13 was 43.6%.

Converged packet optical gear led the revenue growth, at $382 million accounting for 63.3% of the company’s sales in the quarter.

"Our outstanding third quarter performance demonstrates our ability to grow profitability and outperform the market," commented Gary B. Smith, president and CEO of Ciena, via a company press release. "As we expand our addressable market by targeting high-growth, high-value segments, we are confident in our opportunity to grow the business and drive additional operating leverage in 2015."

In addition, the company revealed that AT&T has named the company to its Domain 2.0 program, which will see AT&T move toward implementation of software-defined networking (SDN) and network functions virtualization (NFV) concepts, among other goals. Besides maintaining its existing relationship with AT&T, Ciena views the designation as potentially opening new business within the carrier’s network as well as a validation of its SDN/NFV development efforts.

However, the third-quarter momentum and the AT&T news apparently aren’t enough to overcome headwinds in the second half of the year that Ciena described in the press release as "several significant variables that contribute to a broader range of potential outcomes for both revenue and gross margin than typically expected." The company therefore issued a conservative revenue forecast of between $570 million and $610 million. Non-GAAP gross margin likely will fall within the high 30s to low 40s percent range, the company added.

Investors so far today have decided to focus more on the fourth quarter forecast than the recent positive performance. As of 10:47 am EDT, Ciena’s stock was trading at $18.85, down 7.87%.

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