Investors Take a Shine to Ciena

Shares of the optical networking equipment company jumped Thursday after it swung to a profit on a surge in revenues in the second quarter

Rising demand for digital bandwidth -- and telecom providers' scramble to upgrade their delivery systems -- means good times for Ciena (CIEN). The Linthicum (Md.)-based maker of equipment used to increase the capacity of fiber optic networks announced on May 31 that it swung to a profit in its fiscal second quarter from a year-earlier loss on a jump in revenue.

Ciena said revenue for the three months ended Apr. 30 jumped 47.5% from a year earlier to $193.5 million, as customers bought more optical networking equipment. Net income for the quarter was $13.0 million, or 14 cents per share, vs. a loss of $1.9 million, or 2 cents per share, a year earlier.

The shares surged on the upbeat report, rising 16% to $33.98 in Nasdaq trading May 31 on nearly 7 times their average daily trading volume. The shares touched a 52-week high of $34.18 earlier in the session.

The good news is the company sees the strength continuing into coming quarters. "Given the demand pipeline we see today, we expect to deliver fiscal third quarter revenue growth of up to 5% from our fiscal second quarter, and we are increasing our fiscal 2007 annual growth expectations from between 27%-30% growth to up to 36% growth," said CEO Gary Smith in a May 31 press release.

Ciena's products enable service providers to increase the efficiency and bandwidth of their communications networks, allowing them to service more customers, more cost effectively. Its three largest customers -- Sprint (S), Verizon (VZ), and AT&T (T) -- together accounted for 50% of the company's revenues in fiscal 2006 (ended October).

Ciena, which gets about two-thirds of its revenues from optical networking products, has benefited from new product introductions and penetration into new large customer accounts, according to a Standard & Poor's research note. Telecom operators have stepped up capital spending on network infrastructure to support a material increase in bandwidth demand. Meanwhile, the company has held down costs by using electronic manufacturing service (EMS) providers -- many based in Asia -- to perform most of the assembly operations for its products and components.

RBC Capital analyst Mark Sue remains bullish on the shares, and lifted his target price to $35 from $33 on May 31. Sue says optical demand remains very healthy, as evidenced by Ciena's strong 17% revenue growth over the previous quarter, according to an S&P MarketScope report. The analyst kept his outperform rating on the shares.

Meanwhile, S&P equity analyst Ari Bensinger sounded a more cautious note. While he noted in a May 31 brief that "operating momentum is improving", Bensinger is wary of potential “lumpiness” in Ciena's revenues as it depends on the uneven timing of new carrier network rollouts. He has a hold recommendation and a 12-month target price of $32 on the stock. (S&P, like BusinesssWeek, is a unit of The McGraw Hill Cos. (MHP).)

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