Summary
- Ciena’s fiscal fourth quarter provided evidence of reacceleration, but guidance was the real star, as exceptionally strong order flow drove a sizable backlog expansion.
- The Huawei replacement opportunity should start translating into real business in ’22, with opportunities across the board in India, Europe, and the U.S.
- Ciena enjoys a strong market position in its core optical business, but has growth opportunities in L2/L3 switching/routing, automation software, share gains, and webscale.
- Mid-single-digit long-term revenue growth and high single-digit FCF growth can support a market-beating return from here.
The turn came a little faster than I expected (by a quarter or two), but Ciena’s (CIEN) strong guidance with its fiscal four quarter earnings (reported in early December) confirmed what has been my thesis for some time – that Ciena is the leading optical player and well-placed to leverage strong customer investments in data infrastructure, to say nothing of opportunities to gain share in its core business and leverage new business opportunities.
Ciena shares have given back around half of their post-earnings pop, but are still up more than 20% from the time of my last update. I continue to like these shares, and even with the recent move, I still see a double-digit long-term annualized total return potential from here, and nearer-term potential into the mid-$70’s (if not more).
A Quick Review
Looking back at Ciena’s fiscal fourth quarter, results were more or less in line with expectations. Revenue rose 26% year over year and just beat expectations, with better than 30% growth in the networking equipment business, 14% growth in software, and 8% growth in services.
Gross margin was impacted by supply chain issues and mix, declining more than three points to 46.3% and missing expectations by just 10bp. Operating income rose 34% to $175M (non-GAAP), with margin up a point to 16.8% (a 30bp miss) on better operating expense leverage.
