Shares of optical networking equipment manufacturer Ciena (Nasdaq: CIEN) jumped nearly 4% to $169 in trading early this morning after the company reported strong fiscal third-quarter sales and earnings growth.
Reported earnings of $28.2 million beat analyst estimates by two cents per diluted share and sales grew more than 25% sequentially. Sales of new equipment and a broader customer base helped grow earnings. On the balance sheet, the company lowered days sales outstanding into the target range and increased inventory turns. These are good trends as they signal better management of current assets.
R&D spending falls year-over-year
Investors that look closely, however, might scratch their heads about research and development (R&D) spending. The Linthicum, Maryland-based telecom equipment maker reported R&D expenses of $32.7 million, representing about 14% of sales.
This is way down from the company's R&D investment a year ago. In Q2 1999, Ciena spent $28.4 million on R&D, representing 22% of sales. Let's say R&D had kept pace at 22% of sales. Ciena would have reported net income around $15.6 million, way below the level it reported. What's going on?
Analysts at Dain Rauscher seem to have been caught a little by surprise too, as they expected R&D expenditures of $36 million for the quarter according to an August 2 research report. If Ciena had spent $36 million on R&D, representing 15.4% of sales, it would still have met analyst estimates, earning $0.17 per diluted share.
Numbers alone don't tell the whole story
Suzanne DuLong, Ciena's vice president of investor relations, said last year's R&D level was high relative to sales because the company had just made two acquisitions. Neither company had products on the market at the time, so R&D expenses were high. Now that one of those companies is selling gear, sales are up and R&D as a percentage of sales is down.
DuLong said the company's R&D target is 13% to 15%, putting this quarter's spending right on target.
Here's a comparison of Ciena's R&D expenditures and rival Nortel (NYSE: NT) over the last three fiscal years:
R&D as % of sales Ciena Nortel
1999 21.7% 14.1%
1998 14.5% 14.0%
1997 5.7% 13.9%
For the First nine months of 2000, here's how Ciena's R&D spending compares to last year:
2000 16.2%
1999 21.9%
From the trends, you can see Ciena has certainly increased R&D, though the acquisitions skewed the numbers to the high end. Ciena's 13% to 15% target for R&D compares favorably with Nortel's.
While investors can glean a lot of information looking at financial statements, they should never be viewed in isolation, especially on a quarter-to-quarter basis. It's worth working to find out what business reasons lie behind significant fluctuations in the numbers.
Your Turn:
Is Ciena spending enough on R&D relative to its competitors? Post your thoughts on the Ciena Discussion Board.
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