Tech world on alert after Ciena (CIEN) gives cautious outlook amid order woes

In what could be a wake-up call to the technology sector, which has been resilient to the COVID crisis so far, network equipment maker Ciena Corp. (NYSE: CIEN) last week said its business would be affected by faltering orders — as customers tighten their budgets to preserve liquidity, concerned about the deepening uncertainty.

Ciena disappointed the market last week when it’s stock lost about 30% in the post-earnings selloff, though the steady uptick seen in recent months had lifted investor sentiment earlier. The downturn might be short-lived and experts recommend buying the stock, predicting a strong recovery this year. Long-term investors wouldn’t want to miss the opportunity, given Ciena’s unmatched prowess in optical networking in a market that is witnessing aggressive adoption of new technologies like 5G. Moreover, after the recent pullback, the valuation looks appropriate.

Call for Caution

Initial estimates show that the final months of the year might not be as promising as the first half for the company, with the pandemic-induced drag on orders extending into the fourth quarter as enterprises continue to cut down on technology spending that is not mission-critical. The trend is expected to persist in the coming few quarters. The apprehension is evident in the management’s revenue forecast for the current quarter, which fell short of analysts’ expectations. Worryingly, the weakness will not be confined to the local market but widespread across the world.

Gary Smith, CEO of the Maryland–based tech firm that is touted as the largest provider of optical connectivity solutions, said in his opening remarks during the earnings call, “Notwithstanding a strong quarterly performance and the resiliency of our business model, we are seeing negative effects of the pandemic and greater economic uncertainty weigh on our near-term outlook. We believe that this is being driven by an impact on the velocity, and to some extent, de-prioritization of new business initiatives in general, as well as an increasing customer caution on budget decisions and the timing of spend.”

The Pros

However, Ciena is poised to take advantage of the rapid expansion the telecom industry is expected to witness in the coming years. The market’s response to the company’s optical transport platform WaveLogic 5 Extreme — which was introduced last year — has been encouraging. Going forward, the appetite for capacity expansion should increase among telecom carriers, supported by the growing demand for higher bandwidth.  

Also, a potential migration of customers to Ciena from Huawei, which has been banned in the US, can benefit the former’s business in the long term. The company has already secured some design wins from that source.

Mixed Q3 Outcome

Supported by prudent cost management, third-quarter earnings per share spiked to more than one dollar while revenues inched up to $977 million. The company attributed a part of its impressive margin performance to the creation of differentiated operating leverage in the business model. But it is not very optimistic about the future performance, thanks to the COVID-related drag on orders.

That said, the management is keeping its capital spending strategy intact. Some important projects are lined up this year and next year, with focus on expanding the market share.

We have a quarter that’s slightly off in terms of most of our peers, competitors, and customers and so since this phenomenon really occurred late in our quarter and specifically in the last month of the quarter, it might not have been evident to them at the time they did their earnings. We believe this is very broad and everyone will be talking about this over the next several quarters.

James Moylan, chief financial officer of Ciena

Peer Performance

Last month, Cisco(CSCO) said its core Infrastructure Platforms segment contracted in double digits in the most recent quarter, resulting in an unexpected drop in revenues and earnings. The network gear maker was punished by investors for its weak guidance and the stock plummeted following the report.

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Read management/analysts’ comments on Ciena’s third-quarter performance

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For shareholders, the diminishing prospects of Ciena’s stock bouncing back and regaining past glory could be a cause for worry. The company had a positive start to the year and the last couple of months were exceptionally rewarding. But last week, the shares suffered their biggest loss in nearly two decades following the earnings announcement and traded at a five-month low since then.