Company Overview: Ciena Corporation (NYSE: CIEN) is a networking system, services and software company, offering solutions that enable a broad range of network operators to implement and handle next-generation networks that provide services to businesses and consumers. The company has four reportable segments, namely, Networking Platforms, Platform Software and Services and Blue Planet Automation Software and Services and Global Services.

CIEN Details

Decent Liquidity Position & Geographical Diversification Aid CIEN: Headquartered in Hanover, Maryland, Ciena Corporation (NYSE: CIEN) was founded in 1992 and is engaged in providing optical networking equipment, software, and services. The company remains on track to carry out its business in an environment that indicates significant network traffic growth and emerging automation requirements. Such higher demands are driving the transformation of network designs, which represent market prospects for CIEN.

The year 2019 was marked with robust fundamentals, highlighting the company’s market leadership and strong momentum. In 2019, the company reported more than 15% growth in its revenues on a year-over-year basis. Adjusted operating margin and adjusted EBITDA for the year increased more than 20%, and 30%, respectively. Adjusted EPS went up by more than 50%. Further, direct sales to web-scale customers, garbed more than 40% year-over-year growth, which accounted for ~22% of total revenue for 2019. The company gained ~3% of the global optical market share.

 It is worth noting that the company remained focused on strengthening its balance sheet, by generating more than $350 million in free cash flow, along with the successful implementation of its share buyback plan. The company ended the period with cash and investments of more than $1 billion, after repurchasing ~3.8 million shares for an aggregate purchase price of $150 million. These accomplishments and growth opportunities places the company to gain share and penetrate well into the market. The company remains confident regarding its industry leadership position and expects the same to expand in the years ahead.

In 2019, the company continued to ride with the rapidly growing technical innovation. CIEN’s WaveLogic coherent optical technology persisted to operate well and gained a competitive advantage over its existing and new competitive products. Notably, most recently, the company stated that its WaveLogic 5 Extreme technology will be executed by Hawaiki Submarine Cable LP in a substantial network upgrade, thus aiding customers to face growing demand for more capacity and speed, stemming from the COVID-19 situation.

Coming to the financials, the company witnessed a CAGR of 9.9% in revenue over the period of FY15-FY19. Net income for the same period grew at a CAGR of 115.9%.

Past Revenue Performance (Source: Company Reports)

 The company expects to benefit from the diversification across customer segments and regions as well as its technology leadership, which incorporates the 5th-generation 800-gig WaveLogic modem. The company is also boosting its Packet Networking portfolio with innovative Adaptive IP skills, coherent optics, and objective-built hardware platforms. CIEN’s Blue Planet Automation Software and Services business delivered ~$55 million in revenue in 2019 and remains a key element of the Adaptive Network. Most recently, the company’s Blue Planet business won a contract from BT Group plc to enhance the digital experience of end-users. The company has been diversifying its footprint in data-center connectivity, which positions CIEN to target the next goal Blue Planet business of $120 to $140 million of revenue in FY22.

 3QFY20 Key Financial Highlights: During the quarter, the company reported net income of $142.3 million or 91 cents per share, which increased from $86.7 million or 55 cents per share reported in the year-ago quarter, owing to higher operating income. Net income on an adjusted basis stood at $166.4 million or $1.06 per share, up from $112.3 million or 71 cents per share reported in the year-ago quarter. The company reported total revenues of $976.7 million, which went up ~1.7% on a year over year basis. The company had one 10%-plus customer in 3QFY20, which accounted for 12% of the quarter's revenues. Adjusted gross margins during the quarter stood at 48.2%, up from 44.7% in the year-ago quarter, whereas operating expenditure on an adjusted basis stood at $251.2 million, down from $273.2 million reported in 3QFY19. Operating income also increased from $125.3 million to $188 million in 3QFY20. Operating income on an adjusted basis stood at $219.3 as compared to $156 million reported in the year-ago quarter. During the quarter, adjusted EBITDA stood at $241.1 million, as compared to $178 million reported in the prior corresponding period.

3QFY20 Key Results (Source: Company Reports)

Geographical Performance: On a region-wise basis, revenues in the Americas increased 8.7% year over year and came in at $713.3 million (accounted for 73% of total 3QFY20 revenues). Revenues in Europe, the Middle East and Africa decreased from $169.5 million reported in 3QFY19 to $162.5 million in 3QFY20 (accounted for ~17% of total revenues). Asia-Pacific revenues declined 25.1% year over year and came in at $100.9 million (accounted for ~10% of total revenues).

Geographical Contribution (Source: Company Reports)

Segmental Performance: During the quarter, Networking Platforms’ revenue came in at $802.3 million, which inched up 0.8% year over year. Platform Software and Services’ revenues came in at $46.4 million, up from $37.3 million from the year-ago quarter. Blue Planet Automation Software and Services revenues stood at $11.3 million, up from $10.5 million reported in the pcp. Total revenues in Global Services remained almost flat on a year over year basis and came in at $116.7 million.

Segmental Performance (Source: Company Reports)

 Liquidity Position:  In the first nine months of FY20, the company’s net cash from operations stood at $306.4 million, up from $173.1 million in the prior-year period. As on 1 August 2020, the company’s cash and cash equivalent stood at $1,093.7 million, with net long-term debt amounting to $677.9 million. Cash from operations during the quarter came in at $175 million. Leverage ratio for the period stood at 1.1x.

Key Balance Sheet Items & Operating Metrics at the end of Q3FY20 (Source: Company Reports)

Key Metrics: CIEN reported 3QFY20 operating margin at 19.3%, higher than the industry median of 8.5%. EBITDA margin. In the same time span, came in at 22.9%, higher than the industry median of 16.2%. Aug’20 current ratio stood at 3.56x, higher than the industry median of 1.86x, demonstrating a sound liquidity position. The company remains on track to continue investing in key areas with robust cash flow, which provides the company ample liquidity for unforeseen events.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together formf around 36.4% of the total shareholding. The Vanguard Group, Inc., holds the maximum interests in the company at 9.13%, followed by BlackRock Institutional Trust Company, N.A. that holds 7.86% interest.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company is seeing a slowdown in orders due to the global uncertainties caused by COVID-19 led pandemic, which is expected to hurt revenues, going forward. The company also operates in an extremely competitive market for the sale of communications networking equipment, software and services. It is worth noting that a major portion of the company’s revenue is focused on a small number of customers. Its top ten largest customers accounted for 59.3% of FY19 revenue. Verizon and AT&T accounted for ~12.9% and 10.9% of FY19 revenue, respectively. Therefore, the loss of one or more top ten customers may decrease orders for the company’s services and may dampen its financial stability.

Outlook: For 4QFY20, the company expects revenues to be in the range of $800 million to $840 million. Adjusted gross margin is expected to be in the range of 46% to 48%, whereas adjusted operating margin is expected to be ~$255 million to ~$260 million, for the coming quarter. The company is taking necessary steps to expand its Web-Scale IT Architecture in the enterprise market by unveiling products like new chipsets, metro architecture and mobile backhaul solutions. The company is expected to stay strong given the increase in demand network traffic, demand for bandwidth and higher adoption of cloud architectures. The company is set to report 4QFY20 results on December 10, 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of CIEN closed at $44.8 with a market capitalization of ~$6.9 billion. The stock made a 52-week low and high of $30.58 and $61.52, respectively. The stock went up ~13.7% in the last one month. On a technical analysis front, the stock has a support level of ~$41.6 and an immediate resistance level of ~$46.8. Considering the above factors, we have valued the stock using a P/CF multiple based illustrative relative valuation method. For this, we have considered peers like Juniper Networks Inc (NYSE: JNPR), Cisco Systems Inc (NASDAQ: CSCO), Infinera Corp (NASDAQ: INFN), to name a few, and arrived at a target price which is offering a lower double-digit upside (in % terms). Hence, we give a ‘Buy’ recommendation on the stock at the closing price of $44.8, up by 0.74% as on 30 November 2020.

CIEN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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