Ciena (CIEN) Q2 Earnings, Revenues Surpass Estimates

Ciena Corp. (NYSE:CIEN) reported second-quarter fiscal 2017 non-GAAP earnings (excluding stock-based compensation) of 45 cents, which increased 32.4% on a year-over-year basis. Including stock-based compensation, earnings were 38 cents per share, which beat the Zacks Consensus Estimate of 29 cents.

Ciena reported revenues of $707 million, up 10.3% year over year and ahead of the Zacks Consensus Estimate of $694 million.

The impressive results and positive third-quarter guidance possibly led to the 15.8% increase in share price, which closed at $27.19 on Jun 1.

We also note that shares of the company have outperformed the Zacks Fiber-Optics Market on a year-to-date basis. While the industry lost 9.2%, the stock gained 11.4%.

Quarterly Details

Product revenues (82.7% of revenues) were up 11.6% year over year to $584.6 million. Services revenues (17.3% of revenues) increased 4.8% year over year to $122.3 million.

Segment-wise, networking platforms (80.8% of total revenue) grew 11.57% year over year to $571.5 million, impacted by the addition of 12 new customers in the 8,700 platform and WaveServer.

Revenues from Software and software-related services (5.4% of total revenue) soared 23% year over year to $37.7 million, driven by accelerated software subscription.

Global services revenues (13.8% of total revenue) declined 0.2% from the year-ago quarter to $97.8 million.

Region-wise, Ciena’s revenues grew 7.3% in North America, 9% in Europe, Middle East and Africa (EMEA), 56.8% in Asia Pacific (APAC), but fell 41% in the Caribbean and Latin America.

The huge growth in APAC was primarily driven by revenue contribution from India, which amounted to almost $100 million in the first half of fiscal 2017.

U.S. customers accounted for 60% of its revenues, of which 10% was contributed by one major customer.

The company’s adjusted gross margin expanded 70 basis points (bps) year over year to 45.5% while adjusted operating margin expanded 290 bps to 10.8%.

Balance Sheet

The company ended the quarter with cash and investments of $993.3 million.

Ciena generated solid operating cash flow of $72 million in the quarter compared with approximately $23.4 million in the prior quarter.

Guidance

Ciena also provided its guidance for third-quarter fiscal 2017. Revenues for the current quarter are forecast in the range of $710–$740 million. Non-GAAP gross margin is projected to be approximately in the mid-40% range. Non-GAAP operating expenses are projected to be $235 million.

Our Take

We believe the new 400 gig per wavelength chip, Wavelogic AI, which will be available in summer this year will boost revenues. Being the first of its kind, the product will provide the company an early mover advantage.

Apart from this, the newly launched product Liquid Spectrum has leveraged the company’s growth. Lastly, the long-term opportunities of developing 5G technologies for service providers and Fiber Deep cable MSO customers will also have a positive role to play in further fiber densification of the network.

Ciena is also anticipating stabilized growth in the EMEA zone. The company’s revenues are expected to benefit from its flourishing software segment. It maintains its leading position in the submarine cable upgrade market. All these bode well for fiscal 2017.

However, the company is likely to be affected by increasing competition from other key players in the market like Cisco (NASDAQ:CSCO) and Juniper Networks (NYSE:JNPR) .

Zacks Rank and Stocks to Consider

Ciena carries a Zacks Rank #3 (Hold).

A better-ranked stock in the broader technology space is Applied Optoelectronics, Inc. (NASDAQ:AAOI) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Applied Optoelectronics is projected to be 20%.

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