This Company Proved Analysts Wrong, Once Again

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When communications equipment maker Ciena (NASDAQ: CIEN) released its second-quarter results, one thing became very clear -- the company is indeed ahead of the rest in its industry. Management stated during the first-quarter conference call three months ago that the company’s competitive strengths have kept it ahead of the pack, and that was proved when it released its latest results.

Surprise, surprise!

Ciena surprised the Street with adjusted earnings of $0.02 a share while everyone was expecting a loss of $0.01, making it the second consecutive quarter when the company posted an adjusted profit while analysts were looking forward to a loss. The company posted revenue of $508 million, up 6.3% from last year and comfortably ahead of the $483 million analyst estimate.

Throw in a terrific outlook, which calls for revenue of $515 million-$545 million in the current quarter, comfortably ahead of the $509.5 million analyst estimate, and you’ll know why Ciena shares have been soaring in the high-teens of late. But, more importantly, these results and forecast are proof that Ciena’s execution and industry positioning are indeed terrific, and that carrier spending is strong.

In addition, Ciena saw a considerable improvement of 2.9 percentage points in its non-GAAP gross margin from the year-ago period, and is targeting a mid-40s range in the future. The business has been gaining strength and it’s not surprising. But then, Ciena investors would be hoping that the stock continues to rise going forward and isn’t tempered by other industry news as I’d pointed out before.

A few solid reasons to buy

I’ve said numerous times before that Ciena is one of the best plays to benefit from the growth of cloud computing and network upgrades on the back of its product innovation and huge customer base. The company counts bellwethers such as AT&T (NYSE: T), Verizon, BT, and several other customers across the globe.

Ciena boasts of more than 1,000 customers and its customer engagement is just top class. In fact, 90% of the company’s top 20 customers don’t buy single products, but rather buy solutions across the entire product portfolio according to CEO Gary Smith. Ciena is looking to ride the growth of increased data consumption as a result of cloud computing and growth of mobile computing, and believes that the infrastructure in place will have to be expanded and upgraded over time to satisfy the data boom.

The company’s focus on software intelligence should continue to be a driving force going forward, as Ciena stated that infrastructure as a service is the fastest growing trend in cloud computing. The rising need for programmable and automated networks will lead to multi-year “re-architecturing” and Ciena has placed itself in a position to benefit from this by developing its open architecture.

The company believes that the shift in networking architecture has begun and this should continue to be a tailwind going forward. Throw in the company’s solid clientele, such as AT&T, which is aggressively upgrading its network infrastructure, and the bull case for Ciena looks stronger.

AT&T would be spending around $20 billion on average over the next couple of years as it aggressively rolls out its 4G LTE network. Considering the fact that AT&T is Ciena’s major customer, accounting for more than 10% of its revenue (probably), it should continue to benefit from Ma Bell’s largesse going forward.

Also, Ciena’s customers in other regions, especially Latin America, where it had recently landed a contract with Telefónica Vivo in Brazil to supply its 100G solution, and presence across a number of Tier 1 customers in Asia should provide further boost to the stock going forward. Ciena, like last time, exited the quarter with an order backlog which was greater than the revenue, and this further indicates that the company’s business has gained solid traction.

Playing the Savior

Ciena’s results spread positivity across the optical networking industry, as other players such as Finisar, and most notably JDS Uniphase (NASDAQ: JDSU) soared on the back of its solid performance and outlook. JDS Uniphase, a supplier of optical networking components and 4G LTE test and measurement solutions, had begun the year in style, but dampening industry news from the likes of F5 Networks threw a monkey wrench in its momentum.

The company issued a drab guidance for its ongoing quarter last month, but it was the result of a one-time event as carriers delayed the release of their spending budgets. Even Uniphase had witnessed solid orders and had finished the quarter with a book-to-bill ratio of more than 1. Ciena’s results affirm the fact that telecom spending is up and running, and there’s every reason why JDS Uniphase should also see better times going forward.

 The bottom line

Ciena is up close to 30% this year and I think that its business is strong enough to propel shares even higher. The company has reported two profitable quarters back to back, albeit on a non-GAAP basis, and is gunning for more margin improvements. A solid order backlog and a strong, diversified client base are some great reasons why investors could enjoy further share price appreciation going forward. 

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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