Key points
- Ciena is a leading provider of networking solutions serving telecommunications service providers and is growing its engagement with cloud providers as they now generate more than 54% of revenues.
- Ciena reported strong fiscal first-quarter 2024 EPS, beat by 18 cents, but gave weak fiscal guidance for second-quarter and full-year 2024.
- Ciena’s service provider customers are struggling to dispose of existing inventory as normalization continues, but its more than 50% market share in data center interconnection continues to drive growth.
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Ciena Co. NYSE: CIEN is a leading provider of optical communications and networking solutions headquartered in Hanover, MD. The IT and technology industry leader has been around since the dawn of the Internet and its broadband evolution. The company has evolved to expand its products and services to include hardware and software as a complete one-stop shop for cloud and service providers to provide seamless data, video and voice communications worldwide.
Ciena supports 85% of the world’s largest communications and cloud service providers, including AT&T Inc. NYSE:T, Verizon Communications Inc. New York Stock Exchange: VZ, Microsoft Co. NASDAQ: MSFT, Amazon.com Inc. NASDAQ:AMZN, The Apple company. NASDAQ:AAPL, Alphabet Inc. NASDAQ:GOOGL AND Meta Platform Inc. NASDAQ: META.
These megatrends will continue to drive network traffic
Ciena believes network growth will continue to grow driven by mega-trends, including data centers, internet of things (IoT), digital transformation and automation, cloud and artificial intelligence (AI), and virtual and hybrid lifestyles. Shares were trampled in its fiscal first-quarter 2024 earnings report. Although the company reported a strong EPS beat, its weak guidance caused investors to panic, causing shares to sell off more than 17% in the following days.
The adaptive network is evolving
Ciena supports the adaptive network, offering solutions to customers to make it happen. Its software-defined networking (SDN) features artificial intelligence (AI)-based management and automation to dynamically and seamlessly configure and manage networks. Its adaptive network can self-heal and provide real-time analytics using data, traffic patterns and resources to identify and correct potential problems. Adaptive networking enables programmable, open, and sustainable networks designed to be scalable and agile while adapting to the evolution and needs of the network.
Normalization is still a problem
The main reason for the sell-off was the belief that normalization had not been completed as customers of service providers were still dealing with excess inventory. Telecom service providers constitute a large segment of its customer base. These are companies that provide broadband networks and services to their customers. Its other revenue source is cloud providers, which are healthy and generating growth. Weakness at its service providers, which include mostly non-European telcos and broadband providers, could be a bad sign for them in the first half of fiscal 2025.
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Dear Crush EPS
On March 7, 2024, Ciena announced first-quarter 2024 EPS of 66 cents, beating consensus analyst estimates of 48 cents by 18 cents. GAAP net income was 34 cents per share. Revenue fell 1.8% year over year to $1.04 billion, beating consensus estimates of $1.02 billion. The company repurchased 691,000 shares for $32 million, averaging $42.91 per share in the quarter. Adjusted gross margins were 45.7% and adjusted EBITDA was $160 million. The company ended the quarter with $1.48 billion in cash and investments. The average days of sales remaining was 88 and accounts receivable had a net balance of $865.2 million. Total inventories are $984.9 million.
How Ciena’s revenues were broken down by geographic area
The Americas generated 69.2% of total revenues with $718.2 million. Europe, Middle East and Africa generated 20% of total revenues of $207.4 million. Asia Pacific generated 10.8% of total revenues with $112.1 million. It is worth noting that 2 of its largest customers account for 26.5% of total revenues.
Ciena releases soft guidance
Ciena disappointed investors during the conference call, during which they revealed weak indications. Ciena expects second-quarter 2024 revenue of $850 million to $930 million, lower than consensus analyst estimates of $1.1 billion. The company expects a long-term compound annual growth rate (CAGR) of 6% to 8%.
Insights from the CEO
Gary Smith, CEO of Ciena, believes that bandwidth drivers remain strong and, as a result, very durable in driving network traffic. The company is focused on gaining greater market share. Ciena is leveraging cloud adoption and growing bandwidth trends to extend optical leadership and expand its addressable market in broadband access and metro routing.
Artificial intelligence drives traffic for cloud providers
Cloud and non-telco providers continue to grow as top revenue contributors, generating more than 54% of revenue in the first quarter of 2024. Ciena has expanded its engagements with leading cloud providers to leverage its key innovations as AI evolves as an engine of traffic growth. Ciena is in a strong position with more than 50% market share in data center interconnection.
Smith concluded: “Our commitment to customers remains focused on helping them meet growing bandwidth demand, digitally transform their operations and monetize their networks faster. And, most recently, position them for the rise of artificial intelligence and what it means for network infrastructure and operations.”
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Daily Bull Flag Analysis
The daily candlestick chart on CIEN illustrates a breakout of the symmetrical triangle at $46.04 on January 24, 2024. CIEN rose, forming a flagpole that rose to a high of $57.73. The parallel channel pullback of lower highs and lower lows formed a bull flag breakout pattern to $56.00, sending shares surging to a peak of $63.24 ahead of the fiscal Q1 2024 earnings report .
Unfortunately, the software guidance resulted in a gap from the $61.27 gap to the $55.14 gap fill level as shares continued to sell off to $49.40, losing over 16% in reaction to its earnings guidance. The daily relative strength index (RSI) suffered a sharp decline through the 70 band and slipped below the 40 band. The daily 50-period moving average (MA) resistance is at $53.56, while the MA support daily at 200 periods is at $46.38. The pullback support levels are at $49.40, $46.04, $43.70, and $42.20.
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