Credit Suisse Report 05 March 2010 Excerpts
<<FY1Q10 Earnings Results
¦
Results/Guidance: Rev/PF EPS (ex-ESO) of $175.9mln/$(0.12) vs. our
$189.2mln/$(0.05) and Street consensus’s $184.0mln/$(0.06) ests. FY2Q10
rev guid: $185-195mln vs. Street consensus’s $188.0mln previous estimate.
¦
Credit Suisse Outlook: We reiterate our Outperform rating and 12-month
target price and have increased our operating forecasts. FY1Q10 offered
positive datapoints re wireless backhaul ramp and coming next-gen optical
switch product cycle. Our inv thesis remains intact. We view CIEN as wellpositioned
to address two prominent secular growth drivers: wireless
backhaul upgrades and an optical upgrade cycle driven by the need for
increased bandwidth. While we do not expect integration of the Nortel MEN
business to be trivial, we believe that the acq has meaningfully improved
CIEN’s comp position in the optical equipment market.
¦
Highlights: ( 1) Rev. While FY1Q10 results came up short, rev recognition
delays related to three different customer projects impacted well over
$20mln—not $7 – 9mln, as widely believed—of revenue. ( 2) Wireless
Backhaul. Ramping aggressively—$40mln, up 40+% Q/Q—off of expanding
customer base. (3) CoreDirector. Significant CoreDirector decline—to a
level last posted in FY4Q06—drove the shortfall. A meaningful portion of the
decline appears to be related to a pause in customer purchases of current
CoreDirector ahead of the intro of CIEN’s next-gen optical switch platforms.
CIEN secured four new customers (that have yet to generate rev) during the
quarter—one of which we believe to be a Tier 1 carrier—and expects
“meaningful uptick” in FY2H10. As previously noted, we believe AT&T has
awarded CIEN a $100+mln next-gen optical switch contract. (4) Margins.
We believe ramping backhaul and optical switching rebound in FY2H10
should lead to meaningful margin expansion, beyond our current forecasts.
(5) NT MEN Acq. While integration will not be trivial, against backdrop a
significantly negative investor expectations, we note opportunity—not in our
current forecasts—for significant rev and cost synergies from the acq.
¦
Valuation: Our $19 12-month TP is derived by applying an unchanged 1.5x
EV/Rev multiple to our revised $2.00bln FY11 rev forecast.
Investment Thesis
Near-term, Ciena faces an ongoing challenging carrier capex outlook. Longer-term, Ciena
retains a strong competitive position in the next-generation optical infrastructure market,
which should continue to benefit from network upgrades and re-architecture by service
providers being driven by Web-based video.
Credit Suisse Outlook
In the wake of first quarter fiscal 2010 results, we reiterate our Outperform rating and 12-
month target price and have increased our operating forecasts. While first quarter fiscal
2010 operating results came up short relative to our and Street consensus expectations,
revenue recognition delays related to three different customer projects impacted well over
$20mln—not $7–9mln, as widely believed—of revenue. The quarter offered positive
datapoints regarding an aggressive wireless backhaul ramp and coming next-generation
optical switch product cycle. Our investment thesis remains intact. We expect ramping
customer wireless backhaul deployments to drive meaningful incremental growth over the
next 24 months above current Street expectations. Longer-term, we view Ciena as well
positioned to address two prominent secular growth drivers: wireless backhaul upgrades
and an optical upgrade cycle driven by the need for increased bandwidth. While we do not
expect integration of the Nortel MEN business to be trivial, we believe that the acquisition
has meaningfully improved Ciena’s competitive position in the optical infrastructure market
by bringing together Ciena’s family of next-generation CoreDirector and reconfigurable
5400 series of optical switch platforms and MEN’s industry-leading 40Gbps and 100Gbps
DWDM solutions.
Highlights
FY1Q10 Revenues. While fiscal first quarter 2010 results came up short, revenue
recognition delays related to three different customer projects impacted well over
$20mln—not $7 – 9mln, as widely believed—of revenue. While we do not believe the
investment case for Ciena relies on the fiscal first quarter operating results, and do not
want to give too much credit to delayed revenue recognition, we note that the amount in
question, together with solid April fiscal second quarter 2010 guidance of $185 – 195
million versus consensus’s forecast of $188.0 million, points to a meaningfully better
demand environment than the fiscal first quarter 2010 headline number.
Wireless Backhaul. Consistent with our expectations, Ciena CESD wireless backhaul
platforms continue to ramp aggressively off of a significantly expanding customer base.
CESD platforms generated $40 million up from $28 million in the previous quarter, which
represents a 43% sequential increase, and appear poised for further strong growth for
some time to come. Ciena also noted early, but growing deployments of the CESD
platforms by carriers for delivery of business Ethernet services, which represents an
incremental revenue growth opportunity. Also notably, with gross margin above Ciena’s
current corporate average, the CESD wireless backhaul platforms should drive higher
corporate average gross margin as they continue to ramp and increase as a percentage of
revenue.
CoreDirector Optical Switching. A significant CoreDirector decline—to a level last
posted in the fiscal fourth quarter of 2006—drove the overall revenue and EPS shortfall. A
meaningful portion of the decline appears to be related to a pause in customer purchases
of the current CoreDirector platforms ahead of the introduction of Ciena’s next-generation
optical switch platforms. Speaking to the future outlook for Ciena’s optical switching
business, Ciena secured four new customers (that have yet to generate revenue) during
the quarter—one of which we believe to be a Tier one carrier—and expects a “meaningful
uptick” in the second half of fiscal 2010. As we previously noted (see our “Ciena:
Upgrading to Outperform,” dated January 19, 2010), we believe AT&T has awarded Ciena
a next-generation optical switch contract valued at well over $100 million.
Margins. We believe ramping wireless backhaul and an optical switching rebound in the
second half of fiscal 2010 as Ciena starts to ship its next-generation optical switch
platforms should lead to meaningful margin expansion, beyond our current forecasts.
Nortel MEN Acquisition. While integration of the MEN acquisition will not be trivial,
against the backdrop of significantly negative investor expectations, we note the
opportunity—not in our current forecasts—for significant revenue and cost synergies from
the acquisition. While Nortel's gross margin is meaningfully lower than Ciena's, its
operating expenses are also meaningfully lower as a percentage of revenue. Nortel's
GAAP R&D and SG&A expenses averaged 22.4% and 18.7%, respectively, of Nortel's
revenues over the first nine months of calendar 2010, which is respectively 470 and 520
basis points lower than Ciena's comparable respective 27.1% and 23.9% in its most
recent fiscal first quarter of 2010. Alternatively stated, Nortel's total operating expenses
are running approximately 10 percentage points less than Ciena's operating expenses as
a percentage of revenues. Moreover, the combination, even absent synergies, could be
even better in terms of its impact on Ciena's operating leverage in that Ciena will be
adding only approximately 85% of Nortel's current workforce. Finally, there remains the
opportunity for—potentially significant—operating synergies, which we believe few, if any,
investors currently anticipate. To be clear, we have not factored any such synergies into
our model at this point in time, so should they arise, they would represent upside to our
current estimates.
Estimates
We have revised our fiscal 2010 and fiscal 2011 revenue, pro-forma EPS (excluding ESO)
and pro-forma EPS (including ESO) estimates as follows:
¦ Fiscal 2010: $1.32 billion, $(0.33) and $(0.84) from $1.35 billion, $(0.27) and $(0.69).
¦ Fiscal 2011: $2.00 billion, $0.87 and $0.40 from $1.97 billion, $0.73 and $0.30.
¦ Fiscal 2012: $2.20 billion, $1.33 and $0.86 from $2.17 billion, $1.26 and $0.84.
Valuation
Our $19 12-month target price is driven by applying an unchanged 1.5x Enterprise
Value/Revenue multiple to our revised fiscal 2010 $2.00 billion revenue forecast. Given its
market opportunity, we believe it should trade at an approximate 15% premium to the
current sector average of 1.3x.>>
fyi
Woody |
