On Thursday, communications equipment maker Ciena (click ticker for report: ) reported lackluster fiscal third-quarter results and gave a weak outlook. After falling nearly 20% today, shares are now trading in our fair value range.
Revenue during its fiscal third quarter grew 9% year-over-year, to $474 million, which was in-line with consensus expectations. Due to crumbling gross margins, the firm swung to a $0.04 non-GAAP loss per share compared to an $0.08 profit during the same period a year ago (the former a couple pennies worse than expected). Ciena also guided its fiscal fourth-quarter revenue to the range of $455 million-$480 million, which was well below the consensus estimate of $499 million. Non-GAAP gross margins are expected to be approximately 40% in its fiscal fourth quarter, about in-line with its poor fiscal third-quarter performance.
Though management spoke favorably of market share gains and new open architecture, capital investment in the communications industry remains challenged, particularly in Europe. Still, we saw the networking equipment maker’s higher-margin switching products grow sequentially (up 22%) in spite of a year-over-year decline (down over 7%). Management remains bullish on the view that switching products will become a more meaningful part of the firm’s overall revenue mix going forward, but competition from Cisco (click ticker for report: ) and Juniper (click ticker for report: ) could prevent the firm from becoming a major player in this market. Still, the fiber-optic equipment maker’s software and services business line continues to perform well, up 8.6% sequentially and 21.7% on a year-over-year basis. Regardless, we’re not fans of Ciena, which scores just a 3 on our Valuentum Buying Index (our stock-selection methodology). Our fair value estimate for the firm remains unchanged.
Not surprisingly, most telecom equipment makers with significant exposure to Europe are suffering at this juncture. Alcatel Lucent (click ticker for report: ) announced 5,000 layoffs when it reported earnings in late July, as it deals with sluggish 4G rollouts across the region and a heavy debt load. Competitor Tellabs (click ticker for report: ) is also struggling, as revenue declined 9% year-over-year in its most recent quarter. After losing CEO Rob Pullen to cancer earlier this year, chairman of the board and founder Michael Brick disclosed he has leukemia and thus will not seek re-election to the board.
Though not immune to the industry fundamentals that are ailing peers, we think Cisco is the most attractive investment in the networking space at this time, both from a valuation and dividend-growth standpoint. However, we’re comfortable with our exposure to technology in both our Best Ideas portfolio and Dividend Growth portfolio at this time. Still, Cisco remains one of our favorite firms on our watch list.
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