Ciena Corporation’s (NYSE: CIEN) stock price fell 6% on Tuesday, and further still on Wednesday, despite beating 1st quarter earnings estimates. While the results were solid, it appears the market was hoping for more after the share price rallied 109% since the beginning of 2018.
The networking and communications infrastructure manufacturer reported revenue growth of 21% to $778 million, well ahead of the consensus estimate of $761 million. The company earned $0.21 a share, ahead of the $0.14 analysts expected on a GAAP accounting basis. These results reflect a strong move back to profitability after the company lost $473.6 million, or $3.29 a share, a year earlier.
Webscale Business Now the Key Growth Driver
Ciena’s webscale business, providing equipment to cloud computing companies, grew 64% and now accounts for 22% of revenues. Management highlighted this area of the business as a key driver of future growth.
The company’s strongest showing came in Europe, the Middle East, and Africa, where revenues grew 32%. North America, which still accounts for the bulk of Ciena’s revenue, grew 20.5%. Latin America and the Caribbean revenue fell 11%, but now represents a small share of revenue. Asia showed steady growth of 19%.
The largest product segment, Networking Platforms, grew 25% to $620 million. Both Software and Software-Related Services and Global Services only managed to add single digit growth, meaning the company is now predominantly earning revenue from its Networking Platforms business.
Possible Slowdown Ahead
Gross margins were in line with consensus at 42.2% while operating margin was slightly better than expected at 9.6%. However, the company indicated that its gross margin in the next quarter may be lower than expected, when it expects sales of $800 to $830 million.
Management also indicated that sales may slow later in the year, after an incredibly strong 2018.
Stock Price Outlook
Ciena is well positioned to benefit from further growth in the telecoms, cloud computing and data centre industries. However, the company carries risks, and earnings can be lumpy for a business like this. To a certain extent Ciena’s revenue is dependent on if, and when, its large customers build new capacity.
Judging by the company’s 2018 performance many of these customers may already have done their upgrades for the next year or two.
The forward PE is not demanding given the 1- and 5-year growth rates, but there is a danger that earnings estimates for 2021 may not be high enough to justify the rating later in the year. Management indicated that they have a backlog that may keep earning growth going in the short term – but that will create a very high base for subsequent growth.
There is nothing wrong with Ciena as a company, but right now may not be the time to buy the stock. History has proved that for Ciena and similar companies, the time to buy is when bad news, rather than good news, is in the price.
About Author
The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Grizzle hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.