Ciena Engineers Earnings Beat With Value Destroying ASR
Accelerated share repurchase (ASR) destroys $37.8 million in shareholder value but helped the company top consensus EPS estimate.
March 11, 2022
In the quarter ending January 29, 2022 Ciena (CIEN), a networking and services firm, reported adjusted earnings per share (EPS) of $0.47, or two cents better than the consensus forecast. In the 10-Q— buried in the footnotes on the second to last page— are details of the company’s accelerated share repurchase (ASR) agreement that, according to our analysis, was key in beating Wall Street’s EPS forecast but harmful to investors.
Midway through the quarter, Ciena announced a $1 billion repurchase authorization and four days later hired Goldman Sachs (GS) to execute a $250 million ASR as part of the authorization.
The ASR resulted in the purchase of 2.7 million shares, reducing the quarterly share count to 155,807 milion, and allowing Ciena to report adjusted EPS of $0.47. We calculate adjusted EPS of $0.465, indicating Ciena rounded up. If we add back the repurchased shares, increasing the quarterly share count to 158,505 million, we calculate adjusted EPS of $0.457, in line with the consensus unless you round up.
If Ciena used the ASR to manage earnings and engineer a beat, shareholders did not immediately benefit. The stock fell 10.9% following Ciena’s earnings release despite pre-announcing certain results three weeks earlier.
Likewise, the ASR destroyed $37.8 million in shareholder value by buying back shares at an average price 25% higher than where they trade as of this writing.
Demand for Ciena’s products is robust. Like everyone though, Ciena is supply constrained. It could have sold more product in the quarter but did not receive certain components as expected. Ciena also blamed third party manufacturing disruptions. What’s interesting is when Ciena says the disruptions occurred:
“Due in part to these events occurring later in our first fiscal quarter…”
It suggests the ASR— which was also executed later in the quarter— may have been done to offset the shortfall resulting from supply chain disruptions. That Ciena felt it necessary to manage the quarter in this environment— even though EPS results without the ASR would have met consensus expectations— is a potentially telling sign of management’s judgment.
Management knew or should have known the guidance it planned to issue with the earnings announcement was below street expectations. It also knew or should have known beating on EPS by two pennies in the current quarter is not going to fully offset share price decline when guidance disappoints.
Investors thus far are harshly judging Ciena spending $250 million on stock now worth $212 million, in part, to engineer an earnings beat that resulted in $1.1 billion in market cap vanishing. The Board of Directors seems to be fine with such behavior though as Ciena’s top five executives were awarded more than $20 million in bonuses and stock in FY21.
With $750 million remaining under the buyback authorization, it won’t be the last time management’s judgment is tested under pressure.
Related: CSCO, JNPR, RBBN, INFN, DOX, ADVOF, MRVL, NOK
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