What Does Ciena’s Forecast Cut Say About Optical Demand for AI?

Ciena Co. (NYSE: CIEN) is a leading network and optical communications solutions provider based out of Hanover, MD. The computer and technology sector leader has been around since the dawn of the internet and its broadband evolution. The company has evolved to expand its products and services to include hardware and software as a complete one-stop shop for cloud and service providers to deliver data, video and voice communications seamlessly worldwide.

Ciena supports 85% of the world's largest communication service and cloud providers including AT&T Inc. (NYSE: T), Verizon Communications Inc. (NYSE: VZ), Microsoft Co. (NASDAQ: MSFT), Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc. (NASDAQ: META).

These Mega-Trends Will Continue to Drive Network Traffic

Ciena believes that network growth will continue to grow driven by mega-trends, including data centers, internet-of-things (IoT), digital transformation and automation, cloud and artificial intelligence (AI) and virtual and hybrid lifestyles. Shares were trampled on its fiscal Q1 2024 earnings report. While the company had a strong EPS beat, its soft guidance caused investors to panic, causing shares to sell off more than 17% in the following days.

The Adaptive Network is Evolving

Ciena advocates for the adaptive network, offering solutions for customers to achieve it. Its software-defined networking (SDN) consists of artificial intelligence (AI) powered management and automation to seamlessly configure and manage networks dynamically. Its adaptive network can self-heal and provide real-time analytics using data, traffic patterns and resources to identify and rectify potential issues. The adaptive network enables programmable, open and sustainable networks designed to be scalable and agile as it adapts to network evolution and needs.

Normalization is Still an Issue

The main driver of the sell-off was the belief that normalization hadn't been completed as its service provider customers were still dealing with an inventory glut. Telecom service providers comprise a large segment of its customer base. These are companies that provide broadband networks and services to their customers. Its other source of revenue is cloud providers, which are healthy and generating growth. The weakness with its service providers, which include telecoms and broadband providers mostly out of Europe, could be a bad sign for them in the first half of fiscal 2025.

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Ciena Crushes EPS  

On March 7, 2024, Ciena announced its first-quarter 2024 EPS of 66 cents, beating consensus analyst estimates of 48 cents by 18 cents. GAAP net income was 34 cents per share. Revenues fell 1.8% YoY to $1.04 billion, beating the $1.02 billion consensus estimates. The company bought back 691,000 shares for $32 million, averaging $42.91 per share in the quarter. Adjusted gross margins were 45.7%, and Adjusted EBITDA was $160 million. The company closed the quarter with $1.48 billion in cash and investments. Average days' selling outstanding was 88 and accounts receivable had a net balance of $865.2 million. Total inventories totaled $984.9 million.

How Did Ciena's Revenues Break Down by Geography

The Americas generated 69.2% of total revenues at $718.2 million. Europe, the Middle East, and Africa generated 20% of total revenues of $207.4 million. Asia Pacific generated 10.8% of total revenues at $112.1 million. It's worth noting that 2 of its largest customers represent 26.5% of total revenues.

Ciena Issues Soft Guidance

Ciena disappointed investors during the conference call, during which they disclosed soft guidance. Ciena expects Q2 2024 revenues of $850 million to $930 million, falling short of the $1.1 billion consensus analyst estimates. The company expects a long-term compound annual growth rate (CAGR) of 6% to 8%.

Insights From the CEO 

Ciena CEO Gary Smith believes drivers of bandwidth remain strong and very durable driving network traffic as a result. The company is focused on capturing more market share. Ciena is taking advantage of cloud adoption and growing bandwidth trends to extend leadership in optical and expand its addressable market in broadband access and metro routing.

AI Driving Cloud Provider Traffic

Cloud providers and non-telcos continue to grow as major revenue contributors, generating more than 54% of revenues in Q1 2024. Ciena has been broadening its engagements with major cloud providers to leverage its leading innovations as AI evolves as a traffic growth driver. Ciena is in a strong position with over a 50% market share in data center interconnect.

Smith concluded, "Our customer engagements remain focused on helping them meet the growing demand for bandwidth, digitally transform their operations, and monetize their networks faster. And more recently, positioning them for the rise of AI and what it means to network infrastructure and operations."

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Daily Bull Flag Breakdown

The daily candlestick chart on CIEN illustrates a symmetrical triangle breakout at $46.04 on January 24, 2024. CIEN surged, forming a flagpole that climbed to a peak of $57.73. The parallel channel pullback of lower highs and lower lows formed a bull flag breakout pattern through $56.00, surging shares to a peak of $63.24 heading into its fiscal Q1 2024 earnings report.

Unfortunately, the software guidance resulted in a gap down from the $61.27 gap to the $55.14 gap fill level as shares continued to sell off to the $49.40, losing more than 16% in reaction to its earnings guidance. The daily relative strength index (RSI) took a sharp drop through the 70-band and slipped under the 40-band. The daily 50-period moving average (MA) resistance is at $53.56, and the daily 200-period MA support is at $46.38. Pullback support levels are at $49.40, $46.04, $43.70, and $42.20.