Ciena Corp. (CIEN) is expected to announce third-quarter on Sept. 3. Based on improved order flow, the company expects to deliver sequential revenue growth. Gross margin is expected to be in the mid-to-high 40% range.

However, higher-than-expected prototype costs are likely to affect quarterly results. Non-GAAP operating expenses are expected to be in the low $80 million range. The company sees its tax obligation to be mostly related to non-US regions.

Ciena’s second-quarter results were disappointing as the sales cycle lengthened due to cautious spending by Tier 1 carriers, given the economic uncertainty. The company’s data networking remained weak. This indicates that Ciena would be better off continuing with its strength in optical products such as core switching rather than diverting attention to data networking such as Ethernet.

The company’s balance sheet was reasonably sound and it exited the second quarter with $1.07 million in cash, short- and long-term investments.

Intense competition is eating into the Ciena’s market share. Its larger rivals include Alcatel-Lucent (ALU), Cisco Systems (CSCO), Nortel Networks (NT) and Tellabs (TLAB).

However, Ciena’s FlexSelect platform has been gaining momentum and we expect the acquisition of World Wide Packets to strengthen its revenue base further. The company’s restructuring initiatives to trim operating costs are also positive factors.

Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2010 due to operational execution and growth in data traffic. Thus, we maintain our neutral rating on the stock.

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