Ciena Corporation (CIEN) results (both revenue and earnings per share) for the fourth quarter beat Zacks Consensus Estimates. The company posted better-than-expected results amid cautious consumer spending and weak demand. The more stable macro-economic environment helped the company deliver sequential growth.

Revenue of $176.3 million was down 1.9% year over year but increased 7.0% sequentially, beating the Zacks Consensus Estimate of $163.0 million. This was better than the company’s guidance of sequentially flat revenue.

Revenue for the quarter included $149.1 million in product revenue, which was flat from the year-ago period, and $27.2 million in services revenue, which was down 8.9% year over year.

Ciena’s non-GAAP (excluding one-time and non-cash items) net loss for the quarter was 12 cents per share versus a net loss of 5 cents in the previous quarter, and a net loss of 10 cents per share in the year-ago period. However, EPS beat the Zacks Consensus Estimate of a net loss of 16 cents a share.

The growth in the quarter was driven by improvement in its Carrier Ethernet Service Delivery products and growth in core switching platforms. Sales to international customers represented 29.0% of total revenue in the quarter. The company had one 10.0-plus percent North American customer in the quarter, and this segment overall amounted to 19.0% of total sales.

Adjusted (non-GAAP) gross margin in the quarter was 44.9% versus 46.1% in the year-ago quarter and 46.0% in the previous quarter. The company demonstrated good operational execution, and focus on its cost-cutting initiatives helped Ciena lower operating expenses by 6.6% from the year-ago period. Adjusted operating margin for the quarter was -6.1% versus -7.4% last year.

Ciena exited the quarter with $917.0 million in cash and short-term investments, down from $1.06 billion in the previous quarter. Long-term debt (convertible notes payable) remained at $798.0 million. Cash-flow operations remained positive in the quarter, as the company generated $1.9 million in cash from operations versus $3.5 million in the previous quarter.

We expect the Nortel Network Corp. (NT) deal to be greatly beneficial for Ciena’s business. Ciena acquired Nortel’s optical networking and carrier Ethernet businesses for a total consideration of $769 million. Ciena expects the deal to be significantly accretive to its operations in fiscal 2011. The transaction is expected to close in the first calendar quarter of 2010.

While consumer spending is expected to remain weak, the company expects an increased order flow. Thus management expects a 5% sequential increase in first quarter revenue on a stand-alone basis (the guidance does not include Nortel’s results). With improved market conditions and the launch of new products such as CoreDirector FS and 5400 family, the company expects to gain market share and increase revenue opportunities. Moreover, the company expects more cost-efficient, converged network infrastructures to drive a meaningful network investment cycle for service providers and enterprises.

Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2010 due to favorable operational execution and growth in data traffic.

We maintain our Neutral rating on Ciena’s shares.

Zacks Investment Research

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