Ciena benefits as U.S. metro, long-haul networks awaken

Ciena grew its revenue faster than expected in its fiscal third quarter and narrowed its loss as traffic increases forced the expansion of some long-haul and metro networks in North America.

Ciena’s revenue was up 6.4% sequentially and 46.2% from a year earlier to $110.5 million, beating the company’s own growth guidance as well as analysts’ consensus expectation of total revenue. Gross margin, a particular focus for the company, grew 800 basis points to 34.1%, moving Ciena closer to its goal of at least 40%. Ciena attributed the gross margin gains to its strategy of finding a product mix that would drive margins from the 20s to the 40s.

The bulk of Ciena’s quarterly revenue (nearly 60%) came from the vendor’s transport and switching group, whose contribution increased sequentially from $65 million to $68 million. Long-haul optical and metro transport products such as Ciena’s CoreDirector were the largest contributors in that group during the quarter. Revenue from broadband access, which came mostly from the CNX-5 broadband-upgrade product from its Catena acquisition, amounted to about a fourth of the quarter’s total revenue (up from 18% in the previous quarter), increasing 37% sequentially to $26 million. And revenue from the data networking group rose to $7 million from $5 million in the previous quarter. The company attributed some "softness" in the quarter to a slowdown caused by its customers going on summer vacations.

Ciena Chief Executive Officer Gary Smith reported seeing increased activity in long-haul and metro network expansions in North America resulting from increases in broadband and wireless backhaul traffic. The company reported similar patterns in overseas markets in February.

“Bandwidth in North America may be constrained in some places,” Smith said, judging from recent “capacity-related orders from customers who’ve been quiet for some time.”

Adding to previously announced wins with British Telecom and Deutsche Telekom, Ciena also announced its first win with France Telecom on today’s earnings call, which contributed revenue to the quarter. FT is deploying Ciena’s CoreStream long-haul optical platform. But 81% of Ciena’s quarterly revenue came from the U.S., up from 77% in the second quarter. Ciena’s biggest customers in the quarter were both American: a long-haul carrier and one buying broadband and aggregation products.

When pressed for a timetable on profitability, Ciena Chief Financial Officer Joe Chinnici said, “For the past year, that question has been one that we’ve avoided answering. I’m going to continue to avoid answering it…You’ve just got to hang in there and stay tuned.”

Yesterday Credit Suisse First Boston predicted Ciena could reach positive cash flow by the end of its 2006 fiscal year (Oct. 31, 2006) or shortly thereafter. But to do so, the company would need quarterly revenue between $150 million and $170 million and gross margins of at least 40%.

Ciena predicted its revenue would increase 5% sequentially next quarter for a 41% year-over-year increase, and gross margins would remain the same or increase slightly.

Ciena’s headcount decreased by 119 workers to 1497 in the quarter, mainly due to downsizing of employees in its Ottawa, Canada, plant who came with the acquisition of Catena. On today’s call, Smith vowed to do more offshoring to reduce expenses and look for partners, not to expand its product portfolio but to expand its geographical reach.