Ciena ends FY14 with a thud with greater than expected loss

Ciena Corp. (NYSE: CIEN) ended what proved to be a successful fiscal 2014 with a stumbling fourth quarter. While revenues exceeded expectations, so did the quarter's loss, the company revealed this morning. Yet shares this morning have reversed their initial decline, as company management made a case for optimism in fiscal 2015 in a call with analysts this morning.

Revenues for 4Q14, which ended October 31, 2014, came in at $591.0 million, within the company’s guidance of between $570 million and $610 million (see "Ciena has fiscal 3Q14 good news, 4Q14 not so good news"). The total represented an anticipated decline from the third quarter's $603.6 million but an improvement over the $583.4 million earned in the fiscal fourth quarter of 2013. It also beat Wall Street estimates by about $1.56 million.

However, the company saw a GAAP loss of $30.7 million ($0.29 per diluted share) in the most recent quarter, slightly more than 3X the $9.8 million loss ($0.09 per diluted share) suffered in the year-ago quarter. GAAP gross margin also suffered. The company reported GAAP gross margin of 37.4% for the fiscal year’s final quarter, down from the third quarter’s 43.7% and the year-ago quarter’s 39.7%.

On a non-GAAP basis, 4Q14's loss was $8.2 million ($0.08 per diluted common share), versus a gain of $18.3 million ($0.16 per diluted common share) for 4Q13 – missing Wall Street's expectations by $0.21 per diluted common share. Non-GAAP gross margin for the quarter was 37.9%, still off from the previous quarter's 44.3% and 4Q13’s 40.8%.

By segment on a sequential basis, converged packet-optical transport systems revenue was roughly flat, packet networking and optical transport declined, and software and services revenues increased. On a year-over-year basis, optical transport revenue dropped by about half ($26.5 million in 4Q14 versus $52.6 million in 4Q13); software and services was the only segment to see a year-over-year improvement ($124.8 million in 4Q14 versus $118.7 million in 4Q13).

The fourth quarter's loss overshadowed an overall improvement in Ciena's performance in fiscal 2014. The company reported total year revenue of $2.3 billion, up from 2013's $2.1 billion. Ciena also narrowed its 12-month GAAP net loss to $40.6 million ($0.38 per diluted common share) compared to the GAAP net loss of $85.4 million ($0.83 per diluted common share) of fiscal year 2013.

On a non-GAAP basis, fiscal 2014 net income was $65.8 million ($0.59 per diluted common share), also an improvement over the $59.0 million ($0.54 per diluted common share) net income it earned in fiscal 2013.

But with major Tier 1 customers such as AT&T signaling a decrease in capital spending in 2015 (see "Project VIP capex has peaked says AT&T"), Ciena management forecasted its sequential revenue slide would continue in the first quarter of fiscal 2015. Management forecasted revenues of $540 to $570 million for the quarter, with non-GAAP gross margin in the low 40% range.

The news was enough to send Ciena shares tumbling early this morning after the results were first announced. However, they bounced back after company management forecasted in a conference call with analysts later in the morning that revenue will grow in fiscal 2015 in the 7% to 9% range and that gross margin will return to a range within a low-to-mid 40%. The company management also detailed their efforts to wean themselves from their current reliance on the mainstream telecommunications service providers (such as AT&T) who don't expect to grow capex in the foreseeable future (see "Ciena believes diversification will lead to growth"). These alternative customers accounted for more than 30% of revenue in the quarter, company management asserted.

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