Company Overview

Ciena Corporation (NYSE: CIEN) specializes in networking systems, services, and software. Networking Platforms, Platform Software and Services, Blue Planet Automation Software and Services, and Global Services are the company's four segments. The Converged Packet Optical and Packet Networking portfolios make up the Networking Platforms category. Platform Software and Services provides clients with analytics, statistics, and planning capabilities to help them manage Ciena's Networking Platforms products in their networks. Blue Planet Automation Software and Services provides a micro-service, standards-based open software package that enables companies to achieve large-scale software and IT-led operations support system (OSS) changes. The Global Services division covers sales of a variety of Ciena services such as maintenance, training, installation and deployment, and network design.

Key Takeaways from first quarter FY22 financial results

• Ciena reported sales of USD 844.4 million in the fiscal first quarter of 2022, up from USD 757.1 million in the fiscal first quarter of 2021. Revenue increased by more than 10% year over year in the first quarter, and ongoing broad-based demand fuelled extremely strong order growth.
• The company's flagship 6500 platforms saw a 20% growth in revenue year over year. This performance represents the monetization of some of the new transactions that the firm has signed in the last few years and is now deploying.
• Ciena's GAAP net income for the fiscal first quarter of 2022 was USD 45.8 million, or USD 0.29 per diluted common share, compared to USD 55.3 million, or USD 0.35 per diluted common share, in the prior fiscal year.
• Adjusted operating expenses for the first quarter were USD 290 million. In terms of profitability, the company had an adjusted operating margin of 11.8 percent in the first quarter.

Recent Developments

• On 18^th May 2022, Ciena Corporation announced that Romania-based GTS Telecom is using Ciena Corporation's CIEN 6500 Packet-Optical Platforms to upgrade its network tenfold from 10G to 100G across the nation due to increased capacity demand.
• Ciena coherent optical systems were used by India-based —Vodafone Idea Limited in January 2022. For high-speed 300G/400G services, the telecom operator employs Ciena's 6500 packet-optical platform, which operates on WaveLogic 5 Extreme and may be expanded to 800G.
• Ciena previously teamed up with Gulf Bridge International to improve the latter's Smart Network capacity and performance using its WaveLogic 5 Extreme-powered GeoMesh Extreme technology. GBI's Smart Network now has a capacity of 10 Tb/s across its regional and worldwide networks.
• Ciena Corporation stated on the 5th of May 2022 that it would release its fiscal second-quarter financial results before the opening of the financial markets on Thursday, June 2, 2022.

Other key highlights from Q1 FY22 Financial results

• Ciena's new share repurchase program included a USD 250 million accelerated share repurchase ("ASR") agreement in the first quarter of fiscal 2022. In the second quarter of fiscal 2022, the ASR was finally settled, with about 3.6 million shares repurchased.
• Ciena's adjusted (non-GAAP) net income in the fiscal first quarter of 2022 was USD 72.6 million, or USD 0.47 per diluted common share, compared to USD 81.3 million, or USD 0.52 per diluted common share, in the fiscal first quarter of 2021.

Balance Sheet & Liquidity Position

• Decreased cash balance: The cash and cash equivalent on 29^th January 2022 was USD 1.579 billion reducing from a level of USD 1.6 billion on 30^th October 2021.
• Increased Debt balance: The debt balance on 29^th January 2022 was USD 1.06 billion reducing from a level of USD 670 million on 30^th October 2021.
• Negative Cash flows: Net cash flows used in operations for the first quarter of 2022 were USD 54.41 million compared to USD 7.32 million for the same period a year ago.

Top 10 shareholders

The top 10 shareholders together form around 38.53% of the total shareholding, while the top 4 constitute the maximum holding.  The Vanguard Group, Inc and BlackRock Institutional Trust Company, N.A. hold the maximum stake in the company at 9.44% and 8.12%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Source: REFINITIV, Analysis by Kalkine Group

Risk analysis

• Production risk: Ciena stated that the worldwide supply chain for various raw materials and components utilized in the company's products has lately been strained due to increased demand across a variety of sectors. Furthermore, the COVID-19 epidemic has further exacerbated the situation. This scenario has harmed Ciena's product lead times and may compromise the company's ability to satisfy demand on time. While Ciena has taken initiatives to address these issues, they may have a detrimental impact on its cost of goods sold. Ciena's growth, gross margins, and financial performance might all be affected by the constraints.

Outlook

This year, the business anticipates a good second-half performance, owing to a large expansion in supply chain capacity in the second half. It is forecast to generate revenue in the range of USD 930 million to USD 970 million in Q2, with an adjusted gross margin of 42 percent to 44 percent. This reflects the company's revenue mix expectations for Q2, which include a higher share of lower-margin common equipment. The company's gross margin for fiscal year '22 is estimated to be in the range of 43 percent to 46 percent, with adjusted operating expenses of USD 300 million in Q2.

Valuation Methodology: Price/Earnings Per share - Multiple Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, CIEN's share price has corrected by 19.10%. The stock is currently leaning towards the lower end of its 52-week range of USD 48.16 to USD 78.28. We have valued the stock using the Price/Earnings multiple-based relative valuation method and arrived at a target price of USD 59.22. We believe that the company is trading at a discount from its peer's average but strong fundamentals, a positive outlook, and a good cash position give bullish estimates for the upcoming near future. We have taken peers like Juniper Networks Inc, F5 Inc, Lumentum Holdings Inc, and others for the evaluation of the intrinsic value.

Considering the strong fundamentals, robust sales, positive outlook, associated risks, and current valuation, we give a "Buy" recommendation on the stock at the closing price of USD 49.58, as of May 25, 2022.

CIEN’s Technical Chart, as of May 25, 2022. Data Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary:

*Closing price as of May 25, 2022.

Technical Indicators Defined

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above.

Note 3: The report publishing date is as per the Pacific Time Zone.

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