Summary
- Ciena posted a more or less in-line quarter with a better gross margin mix, but lowered guidance significantly on much weaker near-term service provider capex spending.
- Service providers have had to scramble to accommodate new edge demand from work-from-home, and they have weak visibility into their own enterprise operations today.
- While ZR is a threat to the Webscale business in 2021, Ciena's product should be competitive and WaveLogic 5 is a major opportunity.
- A few quarters of weaker service provider revenue is disappointing, but not unusual in this company's history. I believe this is a strong buy-the-dip opportunity.
“Buy the dip!”
Great advice, right? There’s just one problem – by and large, those “dips” don’t just come out of the blue. For a popular stock with an attractive underlying business, a meaningful selloff requires something that scares the Street, and usually what scares the Street will scare individual investors too.
Ciena’s (CIEN) significant reduction in guidance for the next quarter, and warning that the weakness would likely persist for a few quarters, was indeed scary, but I don’t think it changes the long-term outlook all that much. I think Ciena’s recent success likely attracted investors who weren’t as familiar with the business, and probably lulled more experienced investors into complacency, but the volatility from service provider accounts that Ciena cited is, historically, really not that unusual.
I don’t want to underplay the risk that Ciena’s guidance could still need to be revised further, and I won’t ignore the fact that the Street is a “what are you doing for me today?!?!” world where weaker near-term relative performance can be punished harshly. Still, I think the core of this business is strong, the growth drivers are still place, and the shares are now undervalued.
A Mediocre Set Of Results
Ciena’s fiscal third quarter report wasn’t bad, but it wasn’t exciting either – particularly in the context of the much weaker guidance. Revenue was basically in line, and a modest gross margin beat reversed to a small miss at the operating line.
Revenue rose 2% year over year and 9% quarter over quarter. Network platform revenue rose about 1% yoy and 12% qoq, with converged packet down slightly yoy and up 10%, while the smaller packet networking business grew 11% and 24%, respectively. Service revenue was basically flat, while software grew more than 20% and declined about 4% sequentially. Revenue from telcos declined about 3% yoy this quarter, while cable customer revenue rose 32%. Webscale (enterprise) customer revenue fell about 4%, but rose 14% qoq.
Gross margin rose 350bp from the prior year and 130bp from the prior quarter, with good core profitability in the product and service businesses. Operating income jumped 40% yoy and 37% qoq, with operating margin up strongly (up 530bp yoy and 390bp qoq).
