FYI-GS Analyst Report this morning.
GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS GS
Goldman, Sachs & Co. Investment Research
CIENA Corporation
* * FULL ACTION in the A.M. - U.S. * *
New York Investment Research - NY Equity Research
=================== NOTE 7:39 AM February 19, 1999 ====================
18 CIENA Corporation (CIEN) $20.88
Mary Henry (New York) 1-212 902-6787
EPS (FY Oct): 1999E $0.30, 2000E $N/A - Market Outperformer
* Ciena's January quarter was a bit better than expected on all fronts;
better than expected revenue, slightly better gross margin, good cost
controls, and a small profit instead of the small loss we expected. No
change in our rounded $0.30 estimate for fiscal (October) 1999 or our
calendar 1999 $0.50 estimate, but the year is more backend loaded than
we previously forecast. Many analysts are warming up to Ciena and we
would not be surprised to see a few upgrades of the stock. No change in
our market outperform rating; Ciena is solidly, gradually rebuilding.
* January quarter revenues of $100.4 million exceeded our $95.0 million
forecast and Street estimates. The EPS of $0.02 was better than our
$0.01 loss estimate. Revenue growth included a significant sequential
increase in sales to Sprint, a new Japanese customer that represented
more than 10% of sales, and continued strong sales to the Hermes network
buildout in Europe. About 71% of sales in the quarter came from these
three customers. Ciena sold to 13 customers in the quarter versus 14
customers last quarter and 42% of sales were international, similar to
last quarter. Ciena also recorded revenue to multiple RBOCs in the
quarter.
* While the bulk of Ciena's sales remain long-haul DWDM, there are two
trials of the Metro product, one domestic and one international. We
expect metro to be a small part of total sales this year, but this
product has the ability to kick-start better growth and further customer
diversification, so it should be monitored closely. Next year is the
more likely year for expansion into metro markets.
* Ciena is gradually building enough sales volume to absorb its
considerable overhead. In two or three more quarters, gross margin
should begin to appear more normal, 42-45% or so. In the January
quarter, gross margin was 34.5%, up from 31.2% last quarter but far
below the gross margin a year ago of almost 60%. Gross margin of 42%
should allow the company to post double-digit net margins, which is
probably sufficient for shareholders and reasonable in light of the
competitive environment. Pat Nettles, Ciena's CEO, said pricing has
largely stabilized in DWDM after plunging last year.
* Upcoming catalysts for the stock include the OFC trade show in San Diego
next week, which should attract more attention to optical networking.
On the other hand, plenty of companies are likely to make announcements
at that show as well, which may or may not favor Ciena. (The one to
watch is Cisco, which has a loose marketing arrangement with Ciena now.)
Also the pooling restriction ends in a couple of weeks. The new
Japanese customer will also likely be announced near-term, coming on the
heels of the recent Telemonde win and the Hermes contract extension.
Important Disclosures (code definitions attached or available upon request)
ACTION : No Disclosures
CIEN : M,CS
=============== Further Information ===============
This investment commentary was made available on the Goldman, Sachs & Co.
Research Xpress at 07:47 New York time on 2/19/99.
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