Ciena delivered a beat-and-raise quarter, silencing the critics that continue to question the duration of the 100G coherent optical cycle and the company’s ability to drive operating leverage. While the latter may have been elusive on a quarter-by-quarter basis, Ciena thus far—in the last year and a half that followed the Nortel integration—has been able to demonstrate better operating consistency on a semiannual basis.
The stellar performance in the April quarter, particularly on the bottom line brings home the operating expenditure discipline, in our view. Moreover, as an indicator of improving demand in the second half of this fiscal year, the order backlog improved sequentially this quarter and was meaningfully higher than revenue, leading to $15 million revenue upside to consensus in the current quarter and the result of several company-specific and fundamental market drivers.
Specifically, Ciena: 1) is addressing more applications beyond just the optical transport, such as Ethernet business services, global mesh and submarine networks, long-haul, and metro applications, 2) has a less concentrated tier-1 and more-diversified customer base, with 30% of revenue now coming from Web 2.0/enterprise customers, up from 25% last year and none 5 years ago, and 3) has the capability to address emerging market requirements, such as video and on-demand application fluency driving better customer experience. Given a healthy roadmap for growth with key North American customers, strong international customer expansion, and metro opportunity dashing in, Ciena looks well positioned for double-digit growth in 2014 and 2015.
On the operating side, the company fine-tuned its gross margin outlook to low- to mid-40s from low-40s, and reaffirmed its operating margin commitment of at least 7% for the full year. With numbers increasing and a relatively attractive valuation, we remain buyers of the stock. Given the early stages of the optical cycle, we believe it is reasonable to apply an 18-20 times P/E multiple on fully loaded calendar 2015 operating assumptions, which yields more than 30% expansion from current levels. We reiterate our Outperform rating.
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