Needham & Company analyst, Alex Henderson, cut his estimates but maintained his Buy rating on Ciena after an inline quarter but weak guide. That said, the combination of a book to bill ratio > 1, coming demand from domestic carriers and the oversold nature of the stock makes the analyst comfortable with a Buy rating and his unchanged $30 PT.

CIEN cited a $20MM reduction in its outlook due to the Canadian dollar and Brazilian Real. They also stated that they expected a decline in their European business due to “misexecution” and M&A activity in several Tier 1 Service Providers that have as a result cut back on Capex. Ironically, CIEN stated clearly that European demand is actually solid and improving. CIEN is simply not benefiting from this improvement.

Take Aways:

CIEN has some issues to deal with but they have little to nothing to do with Infinera or the component names.

ALU price aggression may be at the root of the weakness in Europe. ALU is going after market share into the transition to Nokia. They have been the price leader for the last two years. We strongly believe Nokia will be unwilling to allow ALU’s optical unit to continue to post large losses. However, the transition in this strategy should be at least 2-4 quarters in the future.

There is no read-through to INFN - INFN has no exposure to Brazil and no exposure to Canada. They are likely seeing improving conditions in Europe and we certainly do not see any execution issues.

They still prefer the Optical Component stocks to the Optical Systems names: CIEN and INFN have no sales in China, and China demand is driving demand growth. They also note a major upgrade cycle looming inside the Data Center as we move from 10G architectures to 25G. Most of the Optical component names are seeing sold-out conditions well into CY2Q and are at lower valuations.

Book-to-bill is solidly above 1.0 for the third time in 4 quarters.

CIEN Looks Oversold. CIEN has strong demand from Verizon and other Tier 1 Metro players, which should start to help the back half and ramp significantly into CY17.

For an analyst ratings summary and ratings history on CIENA click here. For more ratings news on CIENA click here.

Shares of CIENA closed at $17.28 yesterday.