Summary
- Ciena posted double-digit revenue growth in its fiscal first quarter, but growth was capped by significant supply chain challenges.
- Cable and data center customer spending growth remain strong, and Ciena did well in growth opportunities like routing/switching and software.
- Strong data traffic growth will continue to drive capex spending for several years, and Ciena shares look undervalued below the $70’s.
Supply chain challenges added another pelt to the wall when Ciena (NYSE:CIEN) warned in mid-February that the company would miss fiscal first quarter targets due to supply chain challenges, and management subsequently indicated that supply chain pressures remained a risk in the second quarter. While this is a setback, the company still grew more than 10% in the quarter, is still poised to benefit from significant spending growth in telecom and datacom markets, and is still an attractive play on global data traffic.
These shares have given back about 7% since my last update, underperforming rivals like Cisco (CSCO) and Infinera (INFN) by around 7% to 10%, with Nokia (NOK) performing similarly. While the near-term supply challenges take a trivially small amount of my fair value estimates, the share price decline has these shares set up again for a double-digit long-term total annualized return, making this an attractive name to consider again at this price.
Shackled By Its Supply Chain
Demand is not an issue for Ciena today, but supplying that demand has proven more challenging than management expected. Two supply chain issues late in the fiscal first quarter, one an unexpected shutdown at an EMS partner, the other an unexpected shortfall in low-ASP electronic components (often called “jelly bean components”). While jelly bean components are typically effectively generic, there’s an overall lack of excess capacity/supply these days, and my sense was that the shortfall occurred too late for alternate sourcing to offset the problem.
Revenue rose a little less than 12% year over year in the quarter (and declined 19% sequentially), missing the sell-side target predating the mid-February warning by about 3%. Network product revenue rose 9%, with strong growth in the re-energized routing/switching business (up 33% yoy and 16% qoq) and weaker results in the optical business (up 6% yoy, down 28% qoq). Software revenue rose 41%, with Blue Planet up 25%, while service revenue was up 9%.
