Networking technology provider Ciena (CIEN) reported a fourth quarter 2014 loss of 16 cents per share on Thursday night, but its shares responded positively, with much of the bad news already built in. Ciena reported total revenue in the quarter of $2.3 billion, a 10% increase over 2013.
The stock was trading at $18.29, up about 1% in the morning session.
Shares of Ciena have suffered in recent months on the continued bleak outlook for capital spending (capital spending) at the major service providers. AT&T said on Nov. 10th that it would be shrinking capex by 15% in 2015. The capex fear has in fact been a major theme through the year. The Rayno Report wrote last June that a “Capex Freakout” was already underway.
Ironically, the trend of lower service provider spending is being driven by the benefit of new technology. Service providers have been saying lately that newer Software Defined Networking (SDN) technologies will allow them to shrink capex as networking technology becomes more efficient.
For Ciena, the action in the stock price indicates that much of the bad news may have been built into the market. Ciena issued forward revenue guidance for the first time in years, saying it expects revenue growth of 7 percent to 9 percent in fiscal year 2015. This is the most optimistic outlook in a while.
The company also said that it believes gross margins for the first quarter of 2015 will be in the “low 40s.” Another positive trend is Ciena’s shifting customer base. As major service providers become a point of pain, Ciena’s revenue mix has become less dependent on service providers as it picks up more business in the Web data center and MSO (Multiple Systems Operator) space. Some Wall Street analysts pointed to this as a positive.
“A Hyperscale Web 2.0 customer was the second largest overall in the October quarter and was in the top 10 for FY14,” wrote Michael Genovese, Managing Director and networking analyst with MKM Partners, in a morning research note. “Sales to Cable MSOs increased 34% in FY14. Revenues from non-Telecom customers were over 30% of total sales in 4QFY14 compared to 20%-25% earlier in the fiscal year.”
Ciena pushed this element on the conference call, saying that the “Webscale” community buys enormous amounts of network capacity from Ciena’s service provider and submarine customers around the world. It’s a credible argument, as data-center market growth will clearly drive demand for optical networking gear.
On the technology front, Ciena’s recent announcement of a software-based Network Function Virtualization (NFV) platform has been positively received by the market and indicates the company is building a stragey for SDN and NFV.
Overall, Ciena shored up its finances in 2014, raising more money in a debt deal. The company said it ended the year with $777 million in cash and investments that includes the proceeds from the term loan facility closed last summer.
2015 will prove to be a pivotal year for Ciena and its investors, as several new trends appear to be developing, including a shift to more Web and cable business, SDN technologies, and revenue growth.
(Disclosure: No position in CIEN.)