Ciena's (CIEN) shares have had a wild ride today, rallying up 6% in the morning and reversing significantly this afternoon and currently down 4%.
As we wrote in our quarter summary, the quarter was solid. There was better operating leverage, which led to a 6-cent earnings beat, stronger-than-expected gross margins which also bested expectations by 100-200 bps and in-line revenues for a seasonally slow quarter, this was a solid result. We thought the quarter, even with conservative guidance, was good enough for shares, but that wasn't the case and investors are taking profits with shares up 24% from lows. We did too -- considering we were aggressively buying the stock in the low $20s and wanted to take some profits off the table.
The AT&T deployment news is positive, even if expected. The CEO talked about the strength and strong visibility in the metro build-out (which positions CIEN very well) and continued growth in access edge and the long haul. Also, the company saw a 30% decline in its legacy business which has very positive implications for margins over the long term. So why is the stock down? AT&T held its investor meeting today and indicated that 2014 will be the "peak year" of capex and will likely decline in 2015. Since T is an 18.6% customer to CIEN, people are selling the news.
We don't believe this to mean that T's commitment to optical spending and Ciena will meaningfully change. And in fact, the company said that it doesn't expect to see a material change of its capex budget which is 15-16% of total revenue.
Here are few highlights from the quarter.
Revenue rose 18% y/y, networking revenues rose 13% y/y, switching revenues rose 15% y/y and it shipped three-times more packet capacity of 6,500 products and last year, orders increased 7% y/y and it expects to see an acceleration after 1Q (seasonal), gross margins at 43.4% were higher because of improved mix (and only gets better with the legacy declines), operating expense fell q/q and operating margins expanded to 6% and are expected to be 7-10% by the end of the year (likely the lower end of that guidance). Again, guidance was conservative for its fiscal 2Q, but won't lead to massive revisions ahead in our mind. So, while we took profits today, if the stock keeps falling we'll look to add it back.
Our high-$20s target is unchanged, so if it gets there we'll sell. But today's action is not a panic (which it feels like) and we expect the stock to stabilize in the coming days.
Regards,
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUSwas long CIEN.