Ciena 2Q14 results, 3Q14 guidance counters jitters

Despite analyst concerns that customer AT&T might slow its spending in light of its planned acquisition of DIRECTV and Verizon business also might decline, optical transport and Ethernet switching systems vendor Ciena Corp. (NYSE: CIEN) not only reported that its second quarter results met consensus expectations, but that revenues should continue to grow during the current quarter.

Despite analyst concerns that customer AT&T might slow its spending in light of its planned acquisition of DIRECTV and Verizon business also might decline, optical transport and Ethernet switching systems vendor Ciena Corp. (NYSE: CIEN) not only reported that its second quarter results met consensus expectations, but that revenues should continue to grow during the current quarter.

For the just concluded quarter, which ended April 30, 2014, Ciena reported revenues of $560 million, at the upper end of its guidance of between $540 million and $570 million. The figure represented both sequential growth (Ciena saw revenues of $533.7 million in 1Q14) and year-on-year improvement (versus $507.7 million for the fiscal second quarter of 2013).

Converged packet-optical transport systems were the stars, accounting for $356.8 million of the total, up 21% from 2Q13. Revenues from the packet networking and software and services businesses also improved versus the year-ago quarter. Conversely, optical transport plunged 48% year-on-year, finishing at $29.6 million.

Despite the revenue success, the company still lost money in the quarter from a GAAP perspective. GAAP net loss was $10.2 million ($0.10 per common share), which showed improvement over the GAAP net loss of $27.1 million ($0.27 per common share) in 2Q13.

GAAP gross margin was 42.4%, up a percentage point sequentially and 1.1% from the year-ago quarter.

The results looked typically rosier on a non-GAAP basis. Non-GAAP net income for 2Q14 was $19.4 million ($0.17 per diluted common share), significantly better than the year-ago quarter (net income of $2.2 million, or $0.02 per diluted common share). Non-GAAP gross margin for the just concluded quarter was 43.1%, down 0.3% sequentially but up 0.6% year-on-year.

Cash and investments for the quarter totaled $430.2 million, while cash flow from operations was $2.0 million.

“As a direct result of our expanding role and reach in the industry, we delivered strong financial results in both our second quarter and first half of fiscal 2014, including continued revenue growth and increased operating leverage,” said Gary B. Smith, president and CEO, Ciena, in a press statement. “As the shift continues toward on-demand networking models and as we continue to diversify our business, we expect to deliver steadily improving financial performance, including performance in the second half of the year that is stronger than the first half.”

To underscore that confidence, Ciena guided revenues for fiscal third quarter 2014 to range between $585 million and $615 million. Non-GAAP gross margin should come in at the low to mid 40s percent range, the company added.

The upward guidance contrasts with concerns leading into the week. George Notter, managing director of communications infrastructure equity research at Jefferies & Company Inc., published a note in which he reported that his sources indicate that Ciena customer AT&T is slowing its capital spending. Meanwhile, Simon Leopold, communications equipment analyst and managing director at Raymond James, expressed concern in a preview of Ciena’s 2Q14 earnings announcement that Verizon’s roll out of Ciena 100G technology might slow, and therefore the second half of 2014 could prove challenging for the company.

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