4 Takeaways From Ciena's Long-Term Update

Recently, optical and packet networking company Ciena (NYSE: CIEN) celebrated its 25th birthday. For the occasion, the company not only reported its fiscal fourth-quarter results, but also decided to give investors a high-level view of the company's strategy and growth projections over the next few years.

The stock is not much changed after the report, but it's down nearly 9% over the last 12 months. Bearish analysts are worried about competition and soft industry demand from the large U.S. telecoms, but Ciena believes it's different from its optical and packet networking peers. Here's what management wants you to know.

Harder, better, faster, stronger

Ciena contends that it has transformed itself from just a single-technology business to a diversified player in optical and packet transporting. Therefore, management believes the company is more resilient to industry slowdowns than smaller competitors, which don't have the capacity to invest adequately through down cycles. At the same time, the company also believes it is better-positioned than competitors that are large divisions of huge conglomerates, such as Alcatel-Lucent, which is now part of giant Nokia (NYSE: NOK). Management believes these types of competitors are the victim of competing priorities within large bureaucracies.

In other words, the company says that it has the correct corporate scope -- not too big, not too small. The company notes this is "a very deliberate strategy of being best-of-breed at scale, ensuring that we are the best in the world at moving bits and automating networks."

Moving bits and automating networks: The company looks to have hardware, software, and services in these functions -- no more, no less. You can think of Ciena, therefore, as more of a specialty retailer, as opposed to a mom-and-pop store on one end, or a big-box superstore on the other.

Growth targets

The company also broke down its intermediate-term growth targets for each of its segments and the overall company:

Category 3-Year Growth Target % of Q4 2017 Revenue
Optical systems 4% to 6% 68%
Attached services 4% to 6% 13.9%
Packet networking 6% to 8% 12.5%
Software and related services 14% to 16% 5.6%
Components Approximately $50 million

It should be noted that Ciena has only begun to sell its WaveLogic modem components separately from its fully integrated systems and that the $50 million target is, according to management, "simply a placeholder. We're so early that it's hard for us to predict a number. It could be significantly greater than that or it might not turn out to be anything."

And while these numbers don't exactly scream out "high-growth tech," keep in mind that the industry experienced negative growth over the last year, with global growth (ex-China) declining 4.4%. In that light, the company's 7.7% growth in fiscal 2017 seems downright heroic.

On top of this new revenue guidance, the company also targets 14% to 16% annual adjusted earnings-per-share (EPS) growth, with 60% to 70% of income being turned into free cash flow.

First-ever buyback

Additionally, the company announced that it would not only be buying back its $288 million in convertible debt with cash but would also initiate a $300 million share repurchase program to be executed over the next three years.

That is a testament to how far the company has come. For instance, in just 2013, the company had $712 million in net debt. Fast forward to today, and Ciena actually has a $33 million net cash position. That's a pretty impressive turnaround and a testament to Ciena's management over this time. Shareholders are now set to reap some of the benefits of Ciena's turnaround.


The company predicts 2018 first-quarter revenue of $625 million to $655 million, a bit above last year's Q1 revenue of $621.5 million, with gross margin in the "low-to-mid 40's range," compared with last year's 44%. Management called the lower gross margin "a good thing," as newer customer wins initially have added costs that depress gross margin, even though new customer wins are good for the company long-term.

Ciena seems best-positioned in a tough industry environment. For patient investors who believe the industry will eventually consolidate, Ciena may be worth a look.

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Billy Duberstein has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.