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Ciena (CIEN): The Road Looks Tough

 March 08, 2012 02:51 PM

Optical networking equipment maker Ciena, Inc. (NASDAQ:CIEN) is facing rough waters ahead, operating margins, and revenue growth are at risk.

Maryland-based company's net loss for the first quarter narrowed to $47.65 million or 49 cents per share, from $79.06 million or 84 cents per share in the prior-year quarter. Excluding one-time items, net loss widened to 17 cents per share from 14 cents per share a year-ago and also missed analysts' view of a loss of 5 cents per share.

Ciena's revenues for the quarter declined 3.8 percent to $416.69 million and missed analysts' consensus estimate of $417.17 million.

[Related -Ciena Corporation (CIEN) Q3 Earnings Preview: Can It Pull Off Another Beat?]

Looking ahead to the second quarter, Ciena forecasts revenues in a range of $435 million to $460 million. Analysts expect revenues of $449.10 million. Ciena projects sequential revenue growth in the second quarter and expects its operating results for the second half of the year to be stronger than the first half.

Industry structure is not favorable for Ciena and, it will have to see significant revenue growth to support increased margins. In addition, the metro and long-haul WDM business is very competitive, and Ciena competes with some of the industy's bigger players such as Alcatel-Lucent, Fujitsu, Infinera, and Nokia- Siemens. Compounding the issue, vendors such as Huawei and ZTE continue to export low margin structures out of China.

Wavelength-division multiplexing (WDM) is a technology which multiplexes a number of optical carrier signals onto a single optical fiber by using different wavelengths of laser light.

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During the quarter, the company announced two new 5430 customers. However, the company did mention that 5400 revenue was not a substantial percentage of revenue yet, and it does not expect meaningful 5400 revenue with Tier 1 customers until the end of 2012.

"We continue to be concerned that Ciena will be unable to generate the attractive revenue growth and operating margins that many investors are expecting. Industry structure and a significant component of sales from legacy products remain inhibitors in this regard," Jefferies analyst George Notter wrote in a note to clients.

Notter also expressed his concerns that the industry structure is not conducive to Ciena generating its targeted 10 percent to 12 percent operating margins, over a sustained length of time.

Moreover, it seems that the timing of the ramp in 5430 business have been pushed out a bit and Street is largely over-estimating future revenue growth in the company's Packet Optical Transport division. In addition, investors may not be accounting for a number of legacy products in that business that should decline moderately going forward.

"We recommend investors use the shares (of Ciena) as a source of funds," said Notter, who has an "underperform" rating and price target of $10 on Ciena shares.



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