Consequences Of Ciena For The Work-From-Home Trade

9/16/20

By MarketGyrations SA

Summary

  • Ciena posted strong earnings growth, but guidance and comments at the earnings call caused the stock to lose all its YTD gains.
  • The company issued a warning about an impending industry-wide slowdown that will impact all participants, both in the U.S. and abroad.
  • Ciena is seen as a winner from the work-from-home trend, but the recent revelations call into question whether that assumption is warranted.
  • The pandemic has led to good and bad consequences, but it appears the former may not be strong enough to offset the latter in the case of Ciena.

No surprises were expected from Ciena Corporation (CIEN) with the release of its Q3 quarterly report. Industry peers had all given upbeat assessments, so Ciena was expected to do the same. When the report was released, Ciena did as expected in terms of strong earnings growth. But what was not expected was weak guidance from the company and earnings call comments that call into question whether the bull thesis behind Ciena is as sound as previously thought. Why will be covered next in greater detail.

Q3 FY2020 quarterly earnings

Ciena beat estimates for the top line and bottom line with its Q3 FY2020 report. Q3 revenue grew by a modest 1.7% YoY to $976.7M. While the top line did not change all that much, the same cannot be said of the bottom line. Non-GAAP net income jumped by 48.2% YoY to $166.4M. In terms of earnings growth, Ciena certainly delivered the goods.

(GAAP) Q3 FY2020 Q3 FY2019 YoY
Revenue $976.7M $960.6M 1.7%
Gross margin 47.6% 44.2% 3.4pp
Operating income $188.0M $125.3M 50.0%
Net income $142.2M $86.7M 64.0%
EPS $0.91 $0.55 65.4%
(Non-GAAP)
Revenue $976.7M $960.6M 1.7%
Gross margin 48.2% 44.7% 3.5pp
Operating income $219.2M $155.9M 40.6%
Net income $166.4M $112.3M 48.2%
EPS $1.06 $0.71 49.3%
Source: Ciena Form 8-KHowever, the outlook was a different story. Guidance calls for Q4 revenue of $800-840M, a decrease of 15.3% YoY at the midpoint. Margins are expected to stay elevated in Q4, just like they had in Q3. The forecast expects gross margin of 46-48%, which is above the company's current run rate margin of 43-45%.
(Non-GAAP) Q4 FY2020 (guidance) Q4 FY2019 YoY (midpoint)
Revenue $800-840M $968.0M (15.3%)
Gross margin 46-48% 43.8% 3.2pp

Higher margins are generally seen as a plus, but not in this case. The higher margins seen recently are the result of a shift in revenue mix. There's a higher percentage of revenue coming from existing business and less from new design wins that tend to have lower margins. The higher margins are more a sign of underlying weakness than strength since there are fewer early life projects getting off the ground.

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