Needham & Company analyst, Alex Henderson, points out that CIENA (NYSE: CIEN) guidance for the January quarter was significantly weaker than the positive book to bill ratio would suggest is a sustainable growth rate. The divergence is the result of large Metro orders with acceptance criteria. Ciena's suppliers are seeing strong orders. Ciena noted strong orders. Yet the revenue forecast is soft. This reflects the gap between installation and revenue recognition. This gap is likely to widen in FY16 as these large projects start to ramp.

The tone of the conference call was much more upbeat and consistent with improving conditions for CY16 and CY17. The are reiterating a Buy rating and $30 Target Price.

CIEN noted a “significantly strong bookings than billings,” even without adjusting out the Cyan sales spike

Large metro contracts with acceptance criteria account for the divergence between strong demand and modest growth guidance. There seems to be considerable confusion on the difference between reducing lead times and revenue recognition timing. In mid-2014 CIEN moved to reduce lead times to avoid losing turns business. However, “turns” business is roughly half of Ciena’s product sales. Large installations still often require “customer acceptance,” which can cause a gap in Revenue recognition that can span between 3-12 months or more. Adjusting out Cyan, implied by the guidance is 7-8%, but Needham still expects 10% order growth.

Estimates come down to reflect reductions in guidance. CY16 revenues and EPS estimtes are now $2,695MM/$1.44 (from $2,895MM/$1.54). However, no change to Buy rating or $30 PT.

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Shares of CIENA closed at $19.81 yesterday.