Ciena plunges and takes down peers…

Ciena plunges on sales miss and soft guidance; peers/suppliers also down

In addition to missing FQ1 sales estimates (while beating on EPS), Ciena (CIEN -20.6%) is guiding for FQ2 revenue of $615M-$645M, mostly below a $644.6M consensus. The company also used its earnings call to lower its FY16 (ends Oct. '16) revenue growth guidance to 5-8% from 8%-9%; consensus is for 8.4% growth.

Fellow optical networking hardware firms Infinera (INFN -4.7%) and Adtran (ADTN -2.5%) are also lower. As are optical component firms NeoPhotonics (NPTN -9%), Fabrinet (FN -2.4%), Oclaro (OCLR -3.1%), and Lumentum (LITE -2.1%). NeoPhotonics jumped yesterday in response to strong earnings/guidance; Fabrinet and Oclaro did the same in February.

All of the component manufactures indicate strong demand. NeoPhotonic’s forecast for the next quarter guided 10% above analyst’s estimates. Demand is there. Yet, Ciena guided only 5-8% for the year. Something is clearly wrong with Ciena. Lets dig deeper.

Item 1:
Ciena reports seeing “some recent volatility in the broader macroeconomic environment.”

They may very well see this. But not everyone does. Tom Fallon (from Infinera) told us just two days ago on an investor’s call that he did not see any macro environment effects that concern him. Something must be wrong with Ciena. Still more questions…

Item 2:
On the call, the company mentioned its EMEA sales are soft, and that it’s making changes to deal with the issue.

Aha! This is Transmode territory. Now we’re getting somewhere. On top of this detail, one of Ciena’s lead Sales VPs jumped ship to join Infinera - to oversee the EMEA market. We arrive a little closer at an explanation for item 2.

A strong dollar is also cited as a headwind. Ciena nonetheless expects to post above-market growth outside of EMEA.

Outside the EMEA Ciena still has to compete with Infinera, and Infinera does quite well in the North American market. Notwithstanding, concerns the global macroeconomic conditions exist and I’m sure this detail is affecting customer purchasing choices. So, when presented with two firms with two different business models - one requires significant lead time (because they utilize component suppliers to build the stuff they need) and a binding contract (because they utilize component suppliers and have a binding agreement to pay them for the stuff they need) vs another firm who does not require significant lead time, does not have to deal with component supplier contracts and can deploy your product in a matter of weeks - which firm would you choose? Perhaps this serves as an explanation for item 1.

The market is overlooking (again) Infinera’s structural advantage in vertical integration. This capability is a huge a macro economic environment such as this. Customers know they need to support bandwidth demand, but, they also want to be pragmatic on when they do that. The advantage goes to Infinera.