Tickers in this Article: CIEN, ALU, INFN, FNSR, JDSU, CSCO, JNPR
The communications and networking infrastructure space is sort of like a primetime medical drama. The patients come in riddled with holes or coughing up blood, they stabilize, they seem to get better, there's a sudden turn for the worse (usually about midway through), and then about twenty minutes of artificial tension as the outcome hangs in the balance.

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Unfortunately for shareholders, there's nothing artificial (nor especially entertaining) about the travails and challenges for companies like Alcatel-Lucent (NYSE:ALU), Adtran (Nasdaq:ADTN), Infinera (Nasdaq:INFN), Finisar (Nasdaq:FNSR) or Ciena (Nasdaq:CIEN) these days. While the future of bandwidth demand has never looked brighter and customers are queuing up for new technologies in the 40G/100G category, inventory corrections, unstable order patterns and rampant competition have rippled through the sector for a while now.

Ciena's Quarter - Not Burnt, But Not All Positive
Ciena's stock spiked up about 20% after fiscal third quarter earnings, largely, it would seem, on the back of stronger margins and relief that conditions seem to be stabilizing. It wasn't universally great performance, though. Revenue rose 4% sequentially (and 12% annually), but still came in below the bottom of the Wall Street range of guesses. The company's largest business, packet optical transport, was down more than 2% sequentially (though up 10% annually), but AT&T (NYSE:T) appears to have been a bigger customer this time around.

The company's margin performance pleased the audience. On a GAAP basis, gross margin improved almost three points sequentially and more than five points annually - the non-GAAP performance was a bit more mixed, showing similar good sequential performance, but less year-over-year improvement. On a non-GAAP basis (but not on a GAAP basis) the company did report an operating profit - something it could not do in the second quarter or a year ago. (For related reading, see A Look At Corporate Profit Margins.)

Build It and They Will Buy ... Eventually
Anybody who pays even cursory attention to networking and data infrastructure has heard the "more/better/faster bandwidth" theme and how it should drive demand for companies ranging from Alcatel to ZTE. To be fair, there's a lot of legitimacy to it. Whether it's consumer-driven demand for streaming Netflix (Nasdaq:NFLX) content, music, multi-person digital zombie shoot-'em-ups or business demand for software-as-a-service, there is more and more demand for network capacity. That means that companies like Verizon (NYSE:VZ), AT&T, Time Warner Cable (NYSE:TWC) and Comcast (Nasdaq:CMCSK) choose between the devil or the deep blue sea - upgrade or see the customers with the highest needs (and the most willingness to spend) migrate elsewhere.

Is Ciena the Play?
Ciena has a few things working in its favor. It is leveraged to network upgrades and the backhaul build-out, while also having good 40G/100G products. But then JDS Uniphase (Nasdaq:JDSU), Oclaro (Nasdaq:OCLR), Finisar and many others also say that they have the gear that customers need and want. It leaves investors, especially those without industry contacts to help them sort of who's who, in a quandary.

Finisar arguably has the leadership in many of the advanced tech products that should drive the next upgrade cycle. Juniper (Nasdaq:JNPR) and Cisco (Nasdaq:CSCO) have appealing valuations and market leadership. Ciena is somewhere in between with companies like Infinera and Oclaro likely appealing more as "go with the rising tide" stories.

The Bottom Line
It is hardly time to blow the all-clear for Ciena; this quarter's margin outperformance may not be sustainable and it looks like estimates for the next quarter need to go a little lower after this quarter. Still, the valuations on many companies in this broad category are not demanding and investors may want to think about nibbling at some of the names in anticipation for that next big wave of spending. (Don't be overwhelmed by the many valuation techniques out there. For more, see How To Choose The Best Stock Valuation Method.)

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