Tuesday, January 19, 2010

Ciena (NASDAQ:CIEN): Upgraded to Outperform at Credit Suisse; target raised to $19 - Actionable Call Alert!

Credit Suisse is making a major call on Ciena (NASDAQ:CIEN) upgrading the stock to Outperform from Neutral and raising their price target to $19 (prev. $15.50).

Firm notes they have increased their operating forecasts to $1.50 billion and $(0.42) and $1.94 billion and $0.70 for Fiscal 2010 and Fiscal 2011, respectively, and are introducing Fiscal 2012 estimates of $2.12 billion and $1.19. Their ratings upgrade and improved outlook are based on what they believe will be continued momentum in revenue growth, above current Street expectations, together with improved operating leverage. Longerterm, while the firm does not expect integration of the newly acquired Nortel MEN business to be trivial, they believe that the acquisition has both meaningfully improved Ciena’s competitive position and significantly attenuated its customer concentration. They also note significantly lower investor expectations given the (30)% pull-back in Ciena’s share price from its $16.50 peak on September 22, 2009, which includes an approximate (12)% pull-back since Ciena’s December 9, 2009 fiscal fourth quarter earnings announcement.

Revenue Growth
- CSFB says their field checks indicate continued momentum in revenue growth driven by ramping deployments by service providers of Ciena’s WWP Converged Ethernet platforms for wireless backhaul and, to a lesser extent, business service applications. In addition to ongoing sizable roll-outs at Clearwire and Comcast, they expect AT&T’s wireless backhaul upgrade together with additional new service provider wireless backhaul wins to drive meaningful incremental growth over the next 24 months.

At AT&T, CSFB's checks indicate that, while not finalized, AT&T will name Ciena as one of its two key optical “domain suppliers.” Their checks also indicate that, in an effort to future proof its network and get ahead of the surge in traffic created by the iPhone, AT&T currently plans to deploy 100 Gbps DWDM systems throughout the core of its network in calendar 2011 and that Ciena, by way of its soon to be acquired MEN 40Gbps platform, is the leading contender for this deployment, which they believe could amount to $100 million in 2011 and several hundred million over a two to three year period. As an increasing number of service providers join AT&T in making available the iPhone and similar smart phone devices such as Droid, Blackberry and Palm, the firm believes a number of these carriers will follow AT&T with similar upgrades of their optical transport infrastructure, which in turn should fuel a healthy upgrade cycle for the optical infrastructure market. Given the sizable, cyclical and lumpy nature of service provider optical transport build-outs, CSFB expects 10 – 20% market growth, with the potential for meaningfully stronger growth, over the next couple of years.

Operating Leverage
- The trading history of Ciena’s shares suggests to Credit Suisse that Ciena’s shares should respond very favorably if Ciena does in fact hold opex relatively flat and deliver solid above-consensus revenues in-line with or above their expectations.

CSFB notes they recognize that Ciena has a credibility issue when it comes to operating expense discipline given its poor historical opex management and almost exclusive focus on revenue growth. Fanning this issue, Ciena’s disappointing fourth quarter fiscal 2009 operating performance was both a reminder of Ciena’s checkered past in driving sustained operating leverage and a warning of potential pitfalls associated with the integration of MEN. They do not believe, however, that Ciena's shares at their current valuation are discounting much in the way of operating leverage. Ciena’s share price has declined by approximately (12)%, or $(1.60), since Ciena reported its fourth quarter fiscal 2009 operating results and as of December 31, 2009, short interest in Ciena's shares amounted to 18% of total shares outstanding.

Notwithstanding last quarter’s disappointment, the firm expects to see respectable growth in operating margin. Part of Ciena’s disappointing fourth quarter gross margin was based on what should be a nonrecurring obsolescent inventory charge while part of Ciena’s disappointing operating expenses was due to higher commissions from better bookings. There is significant overlap of platforms and personnel between Ciena and MEN that should allow for sizable operating expense reductions over time—and thereby enhanced leverage. Of course, as noted below, this overlap and the rightsizing of Ciena’s product portfolio and employee base also poses significant risk to the company.

Strategic Exit
As for recent press reports regarding the prospect of Nokia Siemens looking to acquire Ciena, Credit Suisse believes an acquisition of Ciena is ultimately likely, but relatively unlikely in the next 6 – 12 months. To put a fine point on the issue, they would assign a greater than 50% probability to Ciena eventually being acquired, but a less than 10% probability to such an acquisition in the shorter, near-term period

Notablecalls: I think this one can be called an Actionable Call.

Here's why:

- Credit Suisse's checks indicate large service providers like AT&T are ramping deployments, with tier-2-3 not far behind. The opportunities can be measured in hundreds of millions of dollars. That's new info. That's what I want to see.

- Note that Credit Suisse's fiscal 2011/2012 estimates are way-way higher than current consensus.

- Credit Suisse highlights Ciena as an eventual takeover candidate.

- The stock is down over 10% after reporting its quarterly results and down close to 30% from its October $16.50 highs. This means expectations are not high by any means.

- Short interest stands close to 20%, which is a lot for a name like Ciena. I suspect CSFB's call may turn the tables for shorts.

Over the past couple of weeks I have seen the name move intraday on all kinds of speculation and minuscule calls. This is somewhat uncharacteristic for Ciena and tells me the stock is ready to move.

I expect the stock to trade up 7-10% (or higher) putting $12.50 level in play with $12.80-13.00 levels not out of question if the market plays ball. Although I think this call may have the ability to look right trough any market action.

All, in all, Actionable!

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