Tickers in this Article: CIEN, CSCO, ALU, TLAB, INFN, T, CLWR
Optical networking company Ciena (Nasdaq:CIEN) is, if nothing else, a survivor. Although Ciena is thought of as a classic tech-bubble stock, this one actually did not peak until late in 2000 - well after the peaks for rivals like Cisco (Nasdaq:CSCO), Alcatel-Lucent (NYSE:ALU) and the Nasdaq in general. Like Alcatel though, Ciena fell hard and fast as its customers dramatically over-spent on equipment and many went out of business. What remains to be seen is whether Ciena has the ability to produce a second act of profitability and growth.

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A Typical Tech Quarter ... More or Less
Ciena's quarter was not all that different from many others in the tech space. Revenue growth on an annual basis looked very strong (up 137%), while sequential growth was more moderate (up 7%). More specific to Ciena, the company's organic business was rather soft, and growth was really driven by the MEN business acquired a little while ago from Nortel.

Profitability was a mixed bag. Although analysts seem relatively pleased with the company's gross margin, the company nevertheless saw this profitability metric drop on both an annual (down 120 basis points) and sequential (down 150 basis points) basis. As for operating income, there wasn't any - the company had an operating loss this quarter, last quarter and in the year-ago quarter.

One point of note is the company's SG&A spending for the quarter. On one hand, this is a company that pays salespeople for orders and the jump in sales/marketing spending could be seen as a sign of more revenue on the way. On the other hand, "general and administrative" expenses basically tripled from the year-ago level, so it may be that the company is just spending more overall. (For more, see Fundamental Analysis: The Income Statement.)

The Road Ahead
For the time being, there does not seem to be rampant momentum in Ciena's business. A quick look at the financial reports from AT&T (NYSE:T) and Clearwire (Nasdaq:CLWR) suggest that there has been a spending pause at this major customers. On the other hand, the proliferation of smartphones and tablets, led so notably by Apple (Nasdaq:AAPL), could lead to more network spending needs and some solid business prospects for Ciena.

Ciena has built, or perhaps rebuilt, an interesting business. It is the third-largest optical networking company, and it seems to have bought some solid assets at attractive prices right before what should be a cyclical upturn in the industry. That should give the company at least a fighting chance against the likes of Cisco (Nasdaq:CSCO), Alcatel, Infinera (Nasdaq:INFN) and Tellabs (Nasdaq:TLAB).

As an interesting aside, one of (if not the) biggest competitor was not really around during Ciena's first go-around as a hot tech stock. China's Huawei managed to grow while American and European tech companies were gasping in the wake of the tech bubble and now stands as a formidable rival in markets like 40G. (For more, see Top 6 Factors That Drive Investment In China.)

The Bottom Line
So what about Ciena as a stock? This is a company that definitely needs some growth and success, or its leveraged balance sheet will come back to haunt the company and its shareholders. If the company can produce high single-digit revenue growth over the next five years and lift its free cash flow margin into the low-to-mid teens, the stock is clearly cheap. If the company cannot accomplish those metrics (particularly the cash flow), then the company is going to struggle with its debt and shareholders will ignore it in favor of faster-growing names like F5 (Nasdaq:FFIV).

All in all, then, it is a risky, largely binary, stock idea. Ciena looks like an interesting gamble for aggressive and risk-tolerant investors, particularly as it seems that major telecom carriers are locked into never-ending equipment upgrade requirements. It is up to Ciena, though, to prove that it can produce the margins and generate the cash flow to make its market position worth something to shareholders. (For more, see The Characteristics Of A Successful Company.)

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