UPDATE 2-Ciena profit jumps, spending woes hurt shares

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By Franklin Paul

NEW YORK, June 5 (Reuters) - Communications equipment maker Ciena Corp (CIEN.O) posted better-than-expected quarterly profit, but its shares slipped 5 percent amid concerns about increased spending and lower margins.

Net profit for Ciena, whose bigger rivals include Nortel Networks Corp (NT.TO) and Alcatel-Lucent (ALUA.PA), was $23.8 million, or 23 cents a share for the fiscal second quarter ended April 30. That is up from $13.0 million, or 14 cents per share, a year earlier.

Excluding special items, profit was 40 cents a share, beating analysts' average forecast of 37 cents, according to Reuters Estimates.

Second quarter revenue rose 25 percent to $242.2 million.

Looking ahead, Ciena remains optimistic about the full year and stood by its forecast for revenue growth of up to 27 percent. The company was comfortable with the average Wall Street analysts' forecast for third quarter revenue of about $253 million.

However, it sees third quarter gross margin, adjusted for items, in "the low 50s" percentage range -- below the second quarter level of 54 percent.

In addition, it expects to spend more on research and development for the remainder of 2008, and will likely exceed its targeted investment range of 12.5 to 15.5 percent of revenue.

"Gross margin remains difficult for us to predict with accuracy and we expect it will continue to fluctuate from quarter to quarter," Chief Financial Officer Jim Moylan said on a conference call. "Our gross margin ultimately depends on a combination of factors including product and customer mix."

Analysts on the call voiced concern about the company's spending plans and fluctuations in margins, given overall worries from the slowing economy and questions about the behavior of individual clients.

"Previously, investments have yielded pretty impressive results and you clearly expect that to continue but I think given the degree of the increase, we probably need a little more color on once again exactly where you're headed," Merriman Curhan Ford analyst Tim Savageaux said on the call.

Chief Technology Officer Steve Alexander pointed to the increasing importance of software in the company's portfolio. "We see lots of opportunities and we want to invest in them appropriately," he said.

Ciena chief executive Gary Smith, in an interview, said the company is very confident about its long-term performance and maintains a target of operating margins at about 15 percent.

"We have delivered more than that in the last few quarters," he said. "The company is growing very quickly -- faster than the market -- and we intend to continue to invest in a disciplined way. I don't know any other company around our space that is growing at 27 percent and delivering this kind of financial performance."

Shares of Ciena fell $1.28, or 4.2 percent to $29.18 on Nasdaq on Thursday morning after trading as low as $28.46 earlier in the session. (Reporting by Franklin Paul, editing by Maureen Bavdek and Derek Caney)