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Ciena (CIEN) Rides High on Software Sales, Margin Woes Hurt

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Ciena (CIEN) Rides High on Software Sales, Margin Woes Hurt

Ciena's (CIEN) revenues are expected to benefit from rising demand for packet-optical transport and switching products, integrated network and service management software.

On Aug 13, we issued an updated research report on Ciena Corporation CIEN.

The communications equipment provider has expanded its product portfolio beyond core optical networking expertise, thereby extending its customer base and growing its addressable market. The company’s focus on helping carriers transition to next generation networks places it in one of the fastest growing segments of the telecommunications market. Moreover, it has reported a significant rise in the number of customers who prefer its bundled solutions rather than individual products. This is expected to increase customer engagement as well as sales, leading to a recurring revenue stream. The company’s stackable data center interconnect platform — WaveServer — is performing well and is expected to be a key growth driver going ahead.

Ciena’s revenues are expected to benefit from rising demand for packet-optical transport and switching products, integrated network and service management software. The company has been diversifying its footprint in data-center connectivity. This has enhanced its reach into a broader end-to-end optical and data-equipment market. The company is increasingly investing in the data and optical fiber market in order to cash in on the tremendous growth opportunity presented by rising bandwidth demand from network service providers. Moreover, network upgrades by telecom carriers to meet increasing demand bodes well for the company’s long-term growth prospects. Currently, the company is one of the leading suppliers of 40G and 100G optical transport technology. In addition, it is making efforts to expand its Web Scale IT Architecture in the enterprise market by launching products like new chipsets, metro architecture and mobile backhaul solutions. Fiber Deep technology represents a big opportunity for the company driven by the strong adoption of its products among all major cable operators in the global market. We believe that Ciena’s strong product portfolio will boost its top-line growth over the long run.

During second-quarter fiscal 2018, Ciena inked a definitive agreement to acquire Packet Design. The acquisition is likely to accelerate its software strategy and contribute toward its long-term financial goal of growing its Blue Planet and associated services business by approximately 14-16% annually over the next three years. The expansion of Blue Planet software business and network automation capabilities will provide the company competitive advantage and improve its profitability. The buyout will help accelerate Ciena's Blue Planet software strategy by extending its intelligent automation capabilities beyond Layer 0 to 2 into Layer 3, with critical new features to support a broader range of closed-loop automation and optimization use cases across multilayer multivendor networks.

However, Ciena competes against much larger players in the networking industry. The company has a relatively small market share compared to its competitors, due to which, it has to often resort to aggressive pricing to outdo competition. We believe that intense price wars contract margins and remain a significant deterrent to its growth potential.

Ciena has also underperformed the industry in the past three months with an average return of 3.5% compared with a rise of 5.5% for the latter. Customer concentration has been a major impediment for the company. A major portion of the revenues is concentrated among a few, large global communications service providers. Given the competitive nature of the industry, the loss of any one of its key customers could severely impact operating results, going forward. Moreover, earnings estimates have been revised downward by 12.1% in the past 90 days to $1.23 per share, representing bearish sentiments about the growth prospects of the company.

Nevertheless, we remain fairly optimistic on this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are Clearfield, Inc. CLFD, QUALCOMM Incorporated QCOM and Aquantia Corp. AQ, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Clearfield delivered an average positive earnings surprise of 52.8% in the trailing four quarters.

QUALCOMM has a long-term earnings growth expectation of 10.9%. It delivered an average positive earnings surprise of 19.8% in the trailing four quarters.

Aquantia delivered an average positive earnings surprise of 50% in the trailing four quarters.

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