Ciena's Mixed Bag Still Has Favorable Long-Term Outlook

• Ciena Corporation CIEN shares are down 7 percent in the past three months, although they hit a high of $26.03 on June 17.
• BMO Capital Markets analyst Ari Klein maintained an Outperform rating for the company, with a price target of $30.
• Although the company reported mixed results for the quarter, Klein believes that the long-term trends continue to be favorable.

Ciena reported mixed results for the quarter, with lower-than-expected revenues and higher-than-expected margins, EPS and cash flow. The company’s revenue guidance for FYQ4 was below expectations, excluding the impact of the Cyan acquisition.

Ciena indicated that the revenue shortfall was due to a delay in network implementations at several North American Tier 1 carriers, which it views as a “short-term headwind,” given the robust underlying demand.

Ciena’s non-telco business is generating good growth, as the customer base diversifies, and web-scale customers were a “big driver of 100G and 200G demand,” analyst Ari Klein said. Despite the revenue shortfall, gross margins and operating margins were higher than expected, reflecting “mix and continued opex discipline.”

Klein believes that Ciena “remains well-positioned in the optical market” and “should benefit from growing customer diversification, metro optical rollouts, and growth in the DCI market” over the following few years. Ciena has also turned into a much more “reliable and consistent profit generator.” Klein added, “We can expect further margin expansion as near-term revenue headwinds alleviate.”

The revenue and EPS estimates for FY15 have been raised from $2.426 billion to $2.434 billion and from $1.21 to $1.25, respectively. The revenue estimate for FY16 has been raised from $2.665 billion to $2.820 billion, although the EPS estimate for the year has been reduced from $1.65 to $1.62. The estimates have been revised to include the impact of the Cyan acquisition.