Ciena Corporation (CIEN) on Q1 2021 Results - Earnings Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Ciena Fiscal Q1 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Gregg Lampf: Thank you, Sharon. Good morning, and welcome to Ciena's 2021 fiscal first quarter results conference call. On the call today is Gary Smith, President and CEO; and Jim Moylan, CFO. Scott McFeely, our Senior Vice President of Global Products and Services is also with us for Q&A. In addition to this call and the press release, we have posted to the Investors section of our website an accompanying investor presentation that reflects this discussion, as well as certain highlighted items from the quarter. Our comments today speak to our recent performance, our view on current market dynamics, and drivers of our business, as well as the discussion of our financial outlook. Today's discussion includes certain adjusted or non-GAAP measures of Ciena's results of operations. A detailed reconciliation of these non-GAAP measures to our GAAP results is included in today's press release. Before turning the call over to Gary, I'll remind you that during this call, we'll be making certain forward-looking statements. Such statements, including our quarterly and annual guidance and, discussion of market opportunities and commentary about the impact of COVID-19 on our business and our end results are based on current expectations, forecasts and assumptions regarding the company and its markets, which include risks and uncertainties that could cause actual results to differ materially from the statements discussed today. These statements should be viewed in the context of the risk factors detailed in our most recent 10-K filing and in our upcoming 10-Q filing, which is required to be filed with the SEC by March 11 we expect to file by that date. Ciena assumes no obligation to update the information discussed in this conference call whether as a result of new information, future events or otherwise. As always, we will allow for as much Q&A as possible today, so we ask that you limit yourselves to one question and one follow-up. With that, I'll turn the call over to Gary. Gary Smith: Thanks, Gregg, and good morning, everyone. This morning we reported solid revenue and strong profitability for our fiscal first quarter including adjusted operating margin of nearly 15%. This quarterly performance once again demonstrates the strength and durability of our business model, which enabled us to perform well in Q1, despite continued challenging conditions due to COVID-19. James Moylan: Thanks, Gary. Good morning, everyone. We performed as expected in Q1, marking a good start to fiscal 2021. Total Q1 revenue was $757 million. Adjusted gross margin in the quarter was again strong at 48%. Adjusted operating expense in the quarter was $253 million, lower than expected as certain projects and spend shifted out into future quarters. With respect to profitability measures, in Q1, we delivered adjusted operating margin of 14.6%. Adjusted net income of $81.3 million and adjusted EPS of $0.52. In addition, in Q1, cash used in operations was $7 million, consistent with our first fiscal quarter typically being a seasonally soft quarter for cash. Adjusted EBITDA in Q1 was $134 million. We ended the quarter with approximately $1.3 billion in cash and investments. Our balance sheet continues to be a differentiator that speaks to our long-term strength and viability, particularly in the current environment. It also offers us the flexibility to continue investing in our business for the long-term as Gary described, while returning capital to stockholders. To that point, as we reinstituted our share buyback plans during the quarter, we repurchased approximately 250,000 shares for $13 million in Q1. And since the program began, we have repurchased 6.1 million shares for a total of $242 million. Turning now to our guidance. As Gary mentioned, our business has performed largely as we expected within the current market conditions and we are seeing the initial encouraging signs we were anticipating by this time. We are benefiting from the unique advantages of our deliberate strategy to drive innovation, diversification and global scale across our business. From our 800 Gig leadership to our growing software business to the agility of our supply chain, we are well positioned to continue successfully navigating challenging times. Therefore, we continue to expect to grow our annual revenue in fiscal year 2021 in a range of 0% to 3%. Operator: First question comes from Rod Hall with Goldman Sachs. Rod Hall : Yes. Hi. Thanks for the question. I wanted to start off with a question on the guidance, just see stack at the margin guided down a little bit. Maybe you guys could dig into that. Help us understand why that’s happening and then I’ve got a follow-up. James Moylan: Yes. So, Rod, we think that this is sort of good news, because we are starting to see the roll out of some of the deals that we want. So, it’s really a little faster on some of the deals that we’ve had in the offer for a while that have not been able to roll out for various reasons. Rod Hall : Is there any regional color you could give on that, Jim? Is it India or what types of projects are you seeing roll out now? James Moylan: It’s really, generally, I mean, it’s Europe. It’s India. It’s U.S. It’s around the world. Rod Hall : Okay. Thanks for that. And then, on my follow-up, I wanted to just ask competitively, I know that Infinera has talked about a couple of 800 Gig wins. You guys obviously have a whole lot more. I wonder, are you seeing them in the market with 800 Gig? Can you just talk a little bit about the 800 Gig competitive environment as it stands right now? Scott McFeely: Yes. Rod, good morning. As we said in the press release, we are up to – close out the end of the quarter 78, 79 customer wins since the end of the quarter that’s actually increased. By the way, 18 I think of those 79 were brand new logos to Ciena. So, a lot of momentum there. Last, I checked a few weeks ago, that equated to something like 7500 unit shipped to customers. So, as far as I know, we are the only commercially available 800 Gig solution in the marketplace and you can see it in the annual statistics. Rod Hall : And do you guys think that these are just lab deployments then that these guys are talking about? Scott McFeely: 7500 units at a lot of labs, all the other at competitors, I don’t know, you have to ask them. I should – probably, that’s where I want to comment on that. Rod Hall : Okay. All right. Great. Thank you. Gary Smith: Thanks, Rod. Operator: Next question comes from George Notter. Please go ahead. George Notter: Hi guys. Thanks very much. I guess, I wanted to ask about the supply chain dynamics. Obviously, it’s been more of an issue for many companies, I think over the last few quarters. Are you guys having issues with supply chain? And it got factored into your guidance for Q2 or the full year. Any kind of color you could give us will be great. Thanks. Scott McFeely : Good morning, George. So, first of all, as I think you all already probably know as George is referring to specifically the subset of the supply chain that is related to the semiconductor supply chain and ecosystem. And there is an annex that we are seeing on there is, very similar to the dynamics we are have seen and other challenges in the not too distant past on the supply chain and whether you look at components that had a high concentration in areas that were hit hard by the early days of COVID or not too far before that capacitors and resistors and PUPS and power supplies et cetera. And what, for somebody that sits in the sort of system vendor part of the ecosystem like us, what’s really important to be able to navigate those challenges as they come up, is the design of the supply chain and the dimensions of that, but also the willingness and ability to invest in it. And from our perspective we were very deliberate in terms of investing in resiliency on a bunch of different dimensions, geographical, multi-component supply strategies, inventory strategies throughout the supply chain including component levels and distribution partner networks and the confidence in our business and the scale and financial strength to invest in that ecosystem in network. And that served us incredibly well in the past challenges, particularly recently through the COVID challenges and you didn’t see us back off from our service level agreements to our customers or have to talk about it being a significant headwind to us delivering to our financial plans. So, with respect to your specific question with that contracts, we had no impact in our Q1 results to supply chain execution and we expect no to little impact in the immediate quarters in the future. If that situation persists for a long period of time, obviously we are not immune to it. It’s a multi-industry challenge. But given design – giving our continued investment in it and giving how it’s served us in the past, I am extremely confident that in our segment, we will be best-in-class in terms of our ability to continue to serve our customers. George Notter: Great. Thanks a lot guys. Gary Smith: Thank you. Operator: Next question comes from Simon Leopold with Raymond James. Simon Leopold : Thank you very much. Two things. First one is, I just wanted to see if you could help us understand what you are assuming in your outlook as it regards to the Tier-1 international carriers, particularly those in Japan, India and Germany? And then, I’ve got a follow-up. Gary Smith: Yes. And I think it does differ between those. In Japan, the working assumption that from a Ciena point of view is that continues to be sluggish from our perspective I think for the remainder of the year. That’s or working assumption. In India, we are seeing increased activity both in terms of beginning deployments that were held up because of COVID, that’s beginning. And also the award of new business there, primarily I would say driven by the desire to replace Huawei. We are seeing being expedited in India and we won a number of those awards. So, we are seeing good activity in India. We are also seeing strength in EMEA service providers. And to some extent in North America, what we are seeing is, a bit of an amelioration of the portion around operational deployments as Jim noted, it’s a little perverse statistic, but we expect our gross margins to go down slightly, because they are beginning to deploy the things that we won in the last 18 months. So, those are all actually encouraging signs. And then, in Germany, and particularly in Europe, we’ve had a number of wins that we are beginning to deploy. Again, as I said, that’s both with Tier-1, mainly with Tier-1 service providers. But also in Europe, with the dynamic around a lot of the wholesale players providing capacity for the web-scale folks, as well including Germany. Simon Leopold : Appreciate that. And then, just as a follow-up, you did referenced North America. I am assuming you did not have 10% customers in the quarter. But that you expect some improvement in your April quarter from your historic top customers and maybe the reason for the caution, is it at all related to spectrum auctions and what they are paying or are there other issues at play here? Thank you. Gary Smith: The only stance is, it’s difficult to truly discern, Simon. But I think it’s a combination of those things. The amount of capital required to that just the general caution of the COVID environment financially and operationally. But we are seeing a little flooring of that. There are some signs to that. Now that needs to continue for us to achieve our plan in the second half. But we are expecting a much better second half and part of that is, Tier-1 service providers in North America beginning to deploy some of their plans, frankly, I would express it like that. Another way of saying this is, generally across our business, we expect Q1 to be the low point for the year, obviously. Simon Leopold : Thank you. James Moylan: And I would also add that it would not be surprising if we ended up the year with 9% or 10% customers, because we do expect to come back in big Tier-1 service providers. Simon Leopold : Thank you. Gary Smith: Thanks, Simon. Operator: Next question comes from Meta Marshall with Morgan Stanley. Meta Marshall : Great. Thanks. I just wanted to spend a second on the hyper-scale customers. Given that you are at early days of those deployments. Is there any better visibility just because they are just trying to get their hands on kind of new generation of product? And then, just maybe, a second question, and you noted the private LTE product. Are you partnering with anybody on those deployments? Thanks. Gary Smith: Yes. Meta, just on the web-scale, generally, obviously, we’ve got number one market share. We’ve got a massive installed base with the web-scale players and all of the four major players are now customers I think, as we said at the end of last year. The fourth one we’ve now secured. So, we’ve got the large market share there. You can see the strength of Q1, it was 20% directly of our business and a considerable amount indirectly through the carriers around the world. They are all now deploying WaveLogic 5 Extreme in addition to the prior generations of WaveLogic. And we think we are extremely well positioned to grow with that market. Tough for us to really increase market share there given the size of our share, but we are very confident of growing with that market which we think will be in the mid-single-digits in 2021. I think there was some challenges, I think, certainly last year, I am bleeding into this year in terms of their ability to deploy datacenters and build around the world. They are very focused, I think, on ramping that up as best they can and so, we do expect to see some growth this year with the web-scale folks. Scott, do you want to take? Scott McFeely: Yes, and just little - maybe add a color on that one. When we talk about the web-scale customers and the bigger ones and all of them, I think, and almost all, we are certainly in multiple applications. So I think, submarine, core networks, their metro deployments and even managed services to them through the service providers. So, to Gary’s point, they are deploying multiple generations of technology, as they may turn on new generations in one of those applications or a couple to get started. So that’s why we see us with a large installed base and multiple generations of technology in there. To your question on the XOL and that particular one, that was an open XOL. So, that was a direct sale by us to the customer. There was obviously some work on integration and interoperability, but that was addressed by us. Meta Marshall : Great. Thanks. Gary Smith: Thank you. Operator: Next question comes from Paul Silverstein with Cowen. Paul Silverstein : Thanks. Guys, the Street has been worrying about the impact of pluggables, zero and zero plus for a while any insight you can share on your thoughts, more specifically on what you're seeing? Obviously, that's been pushed back somewhat that's coming. And Jim, what are you seeing in terms of the pricing environment? It sort of - I would think would moderate Huawei's, obviously, in are you seeing any improvement in pricing? In terms of Verizon with Nokia I would think would moderate Huawei’s obviously desperate shares. Are you seeing any improvement in prices? Scott McFeely : Hey, Paul, let me try the pluggables question first. So, I think, what we said last time was, we expect to see some potential early deployments of that application and that technology later in 2021 which was quite a push later in time from what people probably would have perceived that it was going to be 12 months or so ago. Our perspective hasn’t changed on that. So, I think, potentially some early get started deployments, but really material deployments starting in 2021. For our play in there, we are basing our product offer off of our WaveLogic 5 nanotechnology. And again, no change from what we said last time there. We expect to have generally available product in the first half of 2021 and the program is executing well on that path. And I’ll ask maybe pass it to Jim on the pricing environment. James Moylan: Thank you, Scott. Paul, we are not really seeing any appreciable change in the pricing environment as of yet now. We’ve seen announcements by Nokia that they are changing their segments that are going to look at the profitability of each of their segments and we think that’s a positive sign, but it’s really too early for that to be sort of in the market yet. No real change. Paul Silverstein : Hey Scott. With respect to your comments, putting aside timeline in terms of magnitude of the impact - magnitude with respect to threat, again, any insight you can share on what you are hearing from customers, both web-scale and traditional communication or responders? Scott McFeely : No. So, if I look at – the short answer is, no. A little bit of color on it and if I look at the ZR application in particular, as it applies to potential DCI, metro and campus we have said in the past that in the fullness of time that might be a total market opportunity of $500 million on annual basis. Our perspective on that hasn’t changed. By the way, that’s – you articulated as a threat, I think it’s also an opportunity, because there are some non-coherent technologies that serve that market today. So, that moving into coherent is an opportunity for those that lead in coherent. And I would say the same thing on the server provider side. It has an opportunity on the access side, not necessarily ZR, but other pluggable technologies becoming coherent is an opportunity. Paul Silverstein : Appreciated. Thank you. Gary Smith: Thanks, Paul. Operator: Next question comes from John Marchetti with Stifel. John Marchetti : Thanks very much. Gary, I was just wondering with the renaming of the packet networking business and seeing some of the focus now on the edge of the network, just with some of the investments you are talking about making there, can you talk about – particularly in Europe, where that’s been a focus, what you are seeing? If you are looking to the rest of this year or maybe a little further out? And if you feel like you need some significant additional efforts there in that portfolio and maybe even the possibility of some M&A focus there? Scott McFeely : Let me try and then, Gary can add some color. So, first of all, what we believe is the winning hand on – in that part of the network is, a combination of, what we’ve called adaptive IP and sort of the next generation , I think of it as an IP, not necessarily burdened by the applications or protocols of the router that was built for the internet 15 plus years ago combined with the convergence of best-in-class optics and intelligent photonic layer. And the software automation tools that go along with that convergence in order to be able to operationalize that in the network. We think that is the architecture of the future and it’s a long game. And we’ve been investing on that for a period of time now and you are starting to see the products come to fruition from those investments, both in our routing of the software, or sorry, running of the switching portfolio, but also in our software assets, Blue Planet, yes, but also in our domain controllers or MCP. Gary Smith: So, John, just to reemphasize that, this is not sort of obviously, as Scott said, sort of an epiphany to us. So, I think we’ve been talking around this kind of convergence actually probably for decades in the industry. But I really did think about opportunities presenting itself as the metro edge, particularly evolves and we’ve been investing heavily, I think basically, we’ve doubled the amount of technical talent that we’ve had on this area in the last couple of years and also, invested heavily on the go to market side. We think we are very well placed. We have an architecture that we think delivers a much more simplified and operationally better economic solution. We think it’s very compelling. We think we have all the elements to that to be successful. Obviously, it wouldn’t roll out additional scale and technology in that space, of course. But right now, we think we have a good path with the architecture and the investments that we’ve made. John Marchetti : Thanks very much. Gary Smith: Thanks John. Operator: Next question comes from Tal Liani with Bank of America. Tal Liani: Hi guys. I have two questions. First of all, probably, I am going to ask you for the next 25 years is, if you can give us an update on Huawei share replacement share gain? And the second one, both of you cautioned us enough about second half guidance that I want to ask about the specifics of your guidance meaning, what are the projects with what type of customers, maybe not customer names, but types of customers and types of projects that need to materialize in order for you to hit your second half guidance? What is assumed categorically, what is assumed in the guidance? Gary Smith: Okay. Let me take the first part of that and then, I’ll hand off to Jim. So the question that you are going to ask me for the next 25 years, same kind of answer I think. I think I described, major opportunity with Huawei is really in Europe and that’s again, to your point about 25 years, probably not that long, but we are in the infrastructure business, this takes time. But time for decisions, time to operationalize, and to get all the back-office done and that is a multi-year program. Whilst this has had a lot of focus for all the reasons that we know in the last sort of 18 months to two years, we saw signs of this before basically just and I would describe it more around reducing dependency. Such a large market share in Europe in all facets of infrastructure and I think the carriers began to realize that, frankly, about three years ago. And you look at some of the wins we’ve had with Deutsche Telekom, with Vodafone, et cetera, those wins I think were centered a long time ago in this dynamic. I expect that to continue. I would also comment with this on the EMEA side, whilst we’ve seen that and that opportunity is very much a tailwind for us. I think the priority right now is on the RAN side, because I think that’s the one that’s got the particular geopolitical focus. But and that’s why I think this will be a multi-year element and we are winning more than our fair share of that. I would, as I mentioned sort of earlier, India, I think, is moving faster in all dimensions of that change out, I think, because of the relationships between the two countries. And we are seeing that being expedited and beginning to be awarded and will begin to roll out and that reflects. To your second point, Tal, some of the assumptions around our second half uptick, basically, I think we are very confident that the second half is going to be a significant uptick to the first. There are certain assumptions to meet that target. They have obviously got to continue and one is, India continues to recover and I think we are pretty confident around that. Second element overall, I would say, is that the Tier-1 service providers, most notably in North America, begin to deploy some of their plans that they've cautiously not deployed. And we are beginning to see that. So I would say, combination of service provider Tier-1s in North America. Europe continues as it is. And that we see this uptick in India. Web-scale, I think we've got pretty good visibility to that. I think they're going to have a good year. You saw or you heard my comments around mid-single-digit growth in web-scale and we will grow at least with the market there. Jim, any other comments on the specifics? James Moylan: Yes. When – and the first thing I'd say is that, we've now gone through one quarter of the year and things are developing as we expected. We feel very confident about the second half of the year. But what we didn't want to impart to anybody is that every – all of the spending is at the levels that they need to be at in order to get to our numbers for the year. That was why we repeated the variables that we put out at the beginning of the year and it's still the case. With respect to how we get to those, we do a lot of forecasting and it's all bottoms up from our sales force. And so, that set of numbers we are talking to comes from sales force indications of what customers are saying they are going to spend for the rest of the year. As Gary said, it's Tier-1 service providers around the world. But I'd also say this, as I’ve said before, our backlog is still not where it needs to be to get to those numbers, it will be we think, as our orders start coming in at stronger rates. But we just wanted everyone to know that things have to continue as they have started to begin. Tal Liani : So Jim, I have just a follow-up. If the carriers get frequencies in December, that's a 100-gig in December and they deploy radios. Assuming they are going to deploy the equipment, that's what Ericsson is saying, they are going to start before the time, not after they are getting the frequencies. Where is your portion of the network in terms of timing, meaning, is it before you put radios? Or is it after you put radios? Do you prepare the backbone optical before or after in all your routers portfolio? So, can you just give us kind of the understanding of a typical deployment where you are – timing-wise, where you are in the process? Gary Smith : Tal, the answer to your question is, yes, to all of the above and I am not being cute there. I mean, and I think about it in some of the real-world examples we've had of that. We've had carriers that build-out in advance of that spectrum, because they are building out converged metro particularly. They are very mindful around putting capacity and the ability to go support that when they put it out there. We've got others that are very hand to mouth with their perspectives around getting capacity into that spectrum as they deploy and so you've got all shades around that. Obviously, there is a correlation and it's good news for us basically. The more they deploy out there, the more speed, the faster they are going to require fiber-fed capabilities. So, generally, it's a big positive. But we are seeing signs what – and it's not – I would say it's not particularly from our perspective spectrum-led at this stage. They had a number of plans to build out that got slowed down, but we are now seeing them – and these are wins that we've had, design wins that we have, that they are now beginning to deploy. Now there is some correlation to spectrum coming on and them leveraging that investment. But it's not as simple as a direct line into all of that. Tal Liani : Got it. Thank you. Gary Smith : Thanks, Tal. Operator: Next question comes from Alex Henderson with Needham. Alex Henderson : Thank you very much. I was hoping you could talk a little bit about an issue around the timing of - and the cadence of inventory purchases. Obviously, there is some constraints around some supplies, but on the other side of the coin, your inventory increased sequentially quite a bit. And I was wondering if you are planning on bringing the inventory down or whether you see the constraints that you are struggling with persisting and therefore anticipating continuing to build inventory? Can you just talk about the direction of that? Scott McFeely : Yes. Good morning, Alex. So, really primarily two things driving the inventory dynamics that you pointed out. One is, it goes back to the second half of the year ramp that we talked about. We have significant, bigger second half than first half and we are working to – for success and sort of priming the pump if you like to be able to deliver to the customers on that ramp. That's number one and that is, by far, the bigger of the two dynamics. Second one is, I'll just say, our own security of supply. So I talked about having the confidence in our business and having the ability to invest in that supply chain. That's what you are seeing happen there in terms of the security of supply and it's not just the most recent semicon piece, but it's also the activities that we've done to protect ourselves from the COVID dynamics that we've talked about in the past. James Moylan: We do expect that our turns will improve. Scott McFeely : Yes. James Moylan: As we move through the year. Scott McFeely : Yes. Alex Henderson : Is it a function of more chassis and less line card and therefore, because of the footprint build? And then the second question I wanted to ask really was around the mix on the revenue guide. Sequentially, it looks to me like, you probably would have a recovery in service sequentially and therefore the majority of the pressure on the quarter is really on the product side. Can you talk a little bit about the cadence between those two as we go into the April quarter? Thanks. Scott McFeely : On the first question, the mix dynamic isn't really what's driving it at all. It's more just prepping the pump for a big uptick in the second half and the security supply dynamics that I talked about. On the second one, Gary? A - Gary Smith Yes. Alex, I think as I think about the rest of the year – I'd make my commentary around the rest of the year and I think the overall trend that we are seeing is the deployment essentially starting of the wins that we've had over the last year or even 18 months and as Jim said, that will weigh on our gross margins, which is kind of a good news, I think, perversely and that will get deployed and will. Our gross margins have improved overall in our baseline as we've said with this fluctuation is really been about not deploying the new business, which we are now seeing. In terms of the mix between services and product, generally speaking, the services for installation are lower margin, which go with the investment in the product side early days. You could express it to chassis and cards, but it's getting a little fuzzier than that, but lower margin at the start of it and some of that is increased installation services as well, which we expect to see through the year. But that's all contained within in our guidance on the gross margins. James Moylan: Only other thing I'd say, Alex, is when you look at our services revenue, a very big chunk, over 50% is maintenance. And so, the deployment is not a big number for many of our customers. We don't do deployment. It's the submarine customers. It's many of our non-U.S. customers and including in Europe. So it's the sequence is not terribly telling except deployment is going to come in at lower gross margins than maintenance on most of our products as well. Gary Smith : Thank you. Alex Henderson : Thanks, Scott. Scott McFeely : Thanks, Alex. Operator: Next question comes from Amit Daryanani with Evercore. Amit Daryanani : Yes. Thank you for taking my question. Maybe a question is on the web-scale business, which did really well this quarter. I think it was up 20%. So I'd love to understand, how do you see the web-scale business today for fiscal 2021 in the context of aggregate brought being 0% to 3%? And then secondly, what do you mean for the competitive environment here today, especially the Cisco-Acacia deal formally done? How does that sort of alter the environment for Ciena? Gary Smith : Hi, Amit. In terms of web-scale yes, we had a very good quarter and we expect to have a good year overall on web-scale. I think they've had some challenges deploying and standing up datacenters around the world in the velocity that they generally would have liked during the last 12 or 18 months. So, based on the plans that we are seeing right now, we would expect growth in the mid-single digits in that space for the year. We've got a very high market share there, probably not going to grow that share, but we are certainly going to maintain it. We've got all of them now taking WaveLogic 5 Extreme in addition to their prior generations and we are engaged in a lot of the planning around the expansions, both in all of their applications in terms of submarine, DCI connectivity, and in their metros as well. So, very, very strong engagement on the web-scale and we think they are going to have a good year. I think there is even the potential for some of them to be a top-10 customer during the year. That's a possibility of one or two of them. We'll see how that goes. But I think generally, we expect a good year in web-scale. James Moylan: And then, with respect to the second question about Cisco and Acacia, I'd remind everybody that we've been competing against Cisco in various parts of the network really for a long, long time and they have been using Acacia technology for a while. So, this is not a change in and of itself. I would say that the excitement in our space is the fact that all of the architectural terminal that’s going on in the metro and in the Edge and all of those things are opportunities for us. And we think that as Scott said earlier, I am sure he will want to add something to this. We think that we have a winning hand in there with the best optics in the business and increasing IP capabilities. Scott McFeely : Yes. The other thing I would add, Jim is, as these architectures play out in our customers’ network, another important dimension but it’s actually going to be the software capabilities to operationalize this, and we think we've been investing for a while, both organically and inorganically on that path and that's going to be a really important part of the winning hand, as you said. Amit Daryanani : Thank you. Thanks for all the clarity. Gary Smith : Thanks, Amit. Operator: Next question comes from Samik Chatterjee with J.P Morgan. Samik, your line is open. Next question comes from Jim Suva with Citi Research. Jim Suva : Thank you very much Gary and Jim. And I'll ask both my questions at the same time. The first question is, when you alluded to or specifically called out the OpEx kind of some push out sometimes that happens because R&D for some of your key customers, they've asked you to change some of the specs on it or sometimes it's just internally at the company like Ciena, maybe you are deploying an ERP upgrade or system upgrade and you just decided to do it later or after COVID. Can you help us understand about why the OpEx got pushed out? Was it customer-driven? Or was it more Ciena-driven? And then, my second question is, you definitely laid out the risks of the second half ramp. When you look at the orders, bookings and discussions with customers, is it aligning to that ramp looking pretty probable or is it aligning to that ramp, having incremental risks that you kind of identified today? Thank you. James Moylan: Hey, Jim. I'll deal with the OpEx question, and then Gary, I think will deal with the second half. With respect to our OpEx, there were no customer push outs or really any intentional push out by us. Our OpEx does have projects in it and the timing of those projects and the timing at which we can complete them and record them just moves around a little bit. And so, I don't think you should read anything into that shift out except that it is shifted out and we are going to spend that money. As I said, we haven't changed our OpEx plan for the year. We will spend the exact amount of time and hours and money except that – I am sorry – for the full year, except that we will be a little higher because of the weakness of the U.S. dollar. Gary? Gary Smith : Yes. On the forecast for the second half, I'd say sort of contextually this. We've been running our business for the last few years going into each quarter with quite a large backlog, quite a large relative backlog each quarter. And so, our ability to forecast over the last few years has been pretty accurate and a large part of that is, you've got the backlog and you've got the pretty accurate forecast of when things are going to happen. I think with COVID that has been disrupted for the reasons that we've talked about and I think we're in the process, we think, of building that back up again. And so, it is a little more challenging for us, which we've expressed last year and as we came into this year. But as Jim also said, things are beginning to roll out as we'd anticipated. When you think about it at a high level, there is more capacity demands going into these networks. They are running the networks hotter. But we've had a period at a time where there has been a general caution around not wanting to operationalize any additional capacity or changes to architecture and also some caution around financial spend. No one has taken their budgets down. No one has stopped projects, but they are not spending at the velocity that they had kind of planned and that's the period we are – I think we're beginning to come out of, but that adds to the uncertainty. But so far, so good in terms of what we are seeing for the year. I think we are very confident about predicting a substantial uptick in the second half of the year. Our ability to be completely precise about that is really dependent on that momentum continuing and us building up our orders and backlog. We have a very sophisticated forecast process that's well tested and it combines, as you’d imagine, backlog, detailed order forecasting by customers, many of which are long-term partners of us and we have very good visibility into and the project plans of things like submarine and some of these new metro architectures. So that all gets taken into account to it. But I think, while we are sort of focusing this is really because we are not operating with a large amount of backlog that we are normally used to. But we are seeing the activity pick up and we've been very explicit, I think, around the assumptions that we think are the headwinds and the tailwinds for us to hit our plan. And I don't think there are many companies actually giving guidance for the full year, but we think that we've got some visibility that we can share that with you, hence our guidance. Jim Suva : Thank you so much for the details and the clarifications. Thank you. Gary Smith : Thank you. Operator: Next question comes from Fahad Najam with MKM. Fahad Najam : Thank you. Good morning. My first question for Jim. Jim, if I look at your last three year trends, your overall full year operating margin tends to be, on average three percentage points higher than your first quarter reported operating margin. Do you expect that trend to continue this year? If not, why not? And do you expect that trend moreover to continue over the next three years? If not, why not? And then I have a follow-up for Gary or Scott. James Moylan: Okay. Thanks, Fahad. Here is what I’d say. It is absolutely true that our Q1 operating margin tends to be the lowest operating margin for the year. That is mainly because, the Q1 revenue has tended to be lower than that of other revenues and our OpEx has generally been sort of flattish through the year. I know there is some movement – and there is. But that's the basic reason. OpEx as a percent of revenue in Q1 has tended to be a bigger number than the other quarters. As we move through the year, first of all, I'd say that we do expect for the year to average 15% to 16%. So, we think that we will show higher operating margins in the later quarters. But I'll also say that sort of offsetting that point is that, as we've said, we expect that gross margin will move down from high 40s to the mid-40s as we move through the year. And so, if you just run the math on that, I don't think that we are going to do 3% better for the year. I think we are going to do 15% to 16% for the year. Fahad Najam : Thank you. And for Gary or Scott, I think you guys alluded to the fact that you are increasingly investing in your IP routing or IP stack capabilities. But do you think or are you comfortable that you have sufficient capabilities today to adjust majority of the Edge and 5G use cases? Or do you think you need more heavy-lifting to kind of get to that majority of the opportunities that are out there? Scott McFeely : Yes. I'll take that Fahad. First of all, the focus of the investment, as you said, was on the metro and the Edge. The use cases that we are pursuing, I would say is combined aggregation networks, 5G, IoT, enterprise connectivity use cases. If we were building to a legacy architecture, we would certainly have a steeper hill to climb in terms of capability sets, but we are actually building to what we believe that our customers are telling us is the architecture of the future which is, as you go back, a thinner layer of IP, where a lot of the application capabilities are no longer embedded in a router they are getting disaggregated onto general compute capabilities. And it really becomes again, back to the winning hand. Adaptive IP layer, world's best optics, a programmable photonic layer and the software automation systems to allow you to drive that converged architecture. That's the lowest cost per bit. That's the most flexible network for our customers and that's what it's going to win in the future. With that definition, we are feeling pretty good about our capability set. Gary's comments earlier, if there was an opportunity to do something inorganically that added to scale, we would look at that. But we are pretty comfortable on the capability of sets we have today and you can see that in the product portfolio that we've released in the last six to nine months on that part of the portfolio. Gregg Lampf : Thanks, Fahad. With that, we will close the call. And we thank everybody for joining us today. We look forward to seeing everyone on the Road virtually over the next few weeks and hopefully in-person, not too long. Everyone, stay well and thank you again. Operator: This concludes today's conference call. You may now disconnect.
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Ciena Positioned as a Long-Term Winner Amid AI-Driven Growth

Jefferies analysts reaffirmed a Buy rating on Ciena (NYSE:CIEN) with a $105 price target, highlighting the company as a top investment idea for 2025. The bullish outlook centered on Ciena's positioning to capitalize on long-term structural trends and the transformative impact of AI on network traffic.

The market, according to the analysts, continues to underestimate the significant growth in AI-driven network traffic, which presents a substantial multi-year tailwind for Ciena. As a leader in optical networking, the company is poised to emerge as the structural winner in the space, bolstered by its technological expertise and market position.

Additionally, Ciena is expected to benefit from the resolution of excess inventory issues among its Tier 1 customers, a challenge that has weighed on performance in recent quarters. With these headwinds dissipating, the company stands to unlock additional growth opportunities. Trading at a relatively modest forward price-to-earnings multiple of 20x, Ciena offers an appealing entry point for investors looking to gain exposure to the AI-driven growth cycle while investing in a proven leader in optical networking.

Ciena Shares Surge 12% Despite Q4 Earnings Miss

Ciena (NYSE:CIEN) experienced a 12% gain intra-day today despite reporting fourth-quarter results that fell short of earnings expectations. For the fourth quarter, Ciena posted earnings per share of $0.54, down from $0.75 in the same period a year earlier and below the consensus estimate of $0.65. Revenue came in at $1.12 billion, a slight 0.5% year-over-year decline, matching analyst expectations.

The networking platforms segment generated $859 million in revenue, a 2% decline year-over-year but slightly surpassing the projected $842.8 million. Converged Packet Optical revenue showed resilience, increasing 4.2% to $779.6 million, beating the $728.5 million analyst forecast.

However, profitability took a hit as adjusted gross margins fell to 41.6%, down from 43.7% last year and below the 43.8% consensus estimate. This decline reflected the pressures impacting the company’s cost structure.

In a leadership update, Ciena announced the appointment of Lawton W. Fitt as the independent Chair of its Board of Directors, effective December 11, 2024. Patrick H. Nettles, the current Executive Chair, will retire following the company’s 2025 Annual Meeting of Stockholders but will remain on the Board to support Fitt’s transition.

Ciena Corporation (NYSE:CIEN) Earnings Report Analysis

  • Ciena's earnings per share (EPS) of $0.54 fell short of the Zacks Consensus Estimate, indicating a decline from the previous year.
  • The company reported revenue of approximately $1.12 billion, surpassing the estimated figures and showcasing its market resilience.
  • Despite a negative market reaction to the earnings miss, Ciena's financial metrics suggest a stable financial position with potential for future growth.

Ciena Corporation (NYSE:CIEN) is a prominent player in the optical networking equipment industry, providing networking systems, services, and software. The company is headquartered in Hanover, Maryland, and competes with other industry giants in delivering high-performance networking solutions. Ciena's recent fiscal fourth-quarter earnings report has drawn significant attention from investors and analysts alike.

On December 12, 2024, Ciena reported earnings per share (EPS) of $0.54, which fell short of the Zacks Consensus Estimate of $0.66. This marks a decline from the $0.75 EPS reported in the same quarter last year, as highlighted by Zacks. Despite this, Ciena managed to generate revenue of approximately $1.12 billion, surpassing the estimated $1.10 billion.

The market reacted negatively to Ciena's earnings miss, leading to a decline in the company's stock price. This reaction underscores the importance of meeting or exceeding analysts' expectations in maintaining investor confidence. The company's price-to-earnings (P/E) ratio of 87.55 reflects high market expectations for future earnings growth, which adds pressure to deliver strong financial results.

Ciena's financial metrics provide insight into its valuation and financial health. The price-to-sales ratio of 3.01 indicates that investors are willing to pay $3.01 for every dollar of the company's sales. The enterprise value to sales ratio of 3.19 further reflects the company's valuation in relation to its revenue. Additionally, the enterprise value to operating cash flow ratio of 35.77 highlights the company's cash flow generation relative to its valuation.

Ciena maintains a moderate debt-to-equity ratio of 0.54, suggesting a balanced approach to leveraging debt. The company's strong current ratio of 4.06 indicates its ability to cover short-term liabilities with short-term assets, showcasing financial stability. Despite the earnings miss, these financial metrics suggest that Ciena remains well-positioned to navigate future challenges in the competitive networking industry.

CIENA Shares Fall After JPMorgan Cuts Price Target

CIENA (NYSE:CIEN) shares fell more than 2% pre-market today after JPMorgan analysts reduced the price target for the company to $60 from $67, while maintaining an Overweight rating.

The analysts adjusted the forecasts for Ciena ahead of the earnings report in the first week of June. Recent discussions with optical equipment vendors at the 52nd Annual TMC Conference revealed a weak recovery in Telecom service provider orders and demand, delaying expectations of a recovery to late 2024 or early 2025. Despite Ciena already lowering its revenue expectations for this year, reaching the mid-point of the full-year revenue guidance of a 5% decline will require a sequential revenue increase from the second quarter's trough levels.

However, with the industry consensus indicating a slower recovery in the Telecom sector, the analysts are more cautious about this ramp-up.

The revised forecast now anticipates an 8% year-over-year revenue decline, with full-year revenue likely to hit the lower end of the $4.0-$4.3 billion guidance. Nevertheless, the second quarter is expected to be the lowest point in terms of revenue, with subsequent quarters showing improvement driven by increasing Cloud orders. This is supported by better Cloud order reports from Juniper and Infinera. The growing momentum of Cloud orders and the eventual cyclical recovery in Telecom are expected to return Ciena to its long-term revenue growth by fiscal 2025, especially considering the expanded Total Addressable Market (TAM) related to Switching & Routing and Access parts of the network.

As the company moves past the trough quarter, the EPS leverage on revenue recovery becomes significant. Ciena is expected to exit fiscal 2024 with a high earnings run-rate and expand earnings by over 20% in both 2025 and 2026.

Ciena Earns an Ugrade at Evercore

Evercore ISI analysts upgraded Ciena (NYSE:CIEN) to Outperform from In Line in a note Friday, raising their price target to $57 from $52 per share.

The analysts expressed to investors that Ciena is considered a high-value asset available at a reduced price. The upgrade to Outperform is based on the belief that Ciena's recent earnings report has effectively adjusted market expectations, setting the stage for the company to outperform and potentially increase its forecasts during the fiscal year 2024.

The analysts anticipate that growth in cloud and Indian markets could compensate for any potential weaknesses in the North American service provider segment. This could lead to a possible 5% revenue growth in fiscal year 2024, surpassing the current guidance of 1-4%.

Additionally, they see a chance for a gross margin improvement of about 200 basis points, aided by a better product mix and reduced supply chain costs, compared to the company's forecast of around 45% gross margin in fiscal 2024.

Ciena Shares Rise on Q4 Beat

Shares of Ciena (NYSE:CIEN) experienced a 2% increase intra-day today after the company reported fourth-quarter results that surpassed expectations, attributed to strong performance from cloud customers.

Ciena's revenue saw a 21% rise, reaching $1.13 billion and surpassing the anticipated $1.1 billion. The adjusted earnings per share (EPS) were $0.75, exceeding the expected $0.69 and showing an increase from $0.61 in the previous year.

Gary Smith, President and CEO of Ciena, remarked on the company's performance stating that the fiscal fourth quarter exhibited strong results, largely driven by increasing demand from cloud provider customers. This year, the company achieved a significant 21% growth in revenue, greatly expanding its market share and reinforcing its leadership position in the industry. As Ciena continues to pursue its strategy of enhancing its market leadership in optical solutions and expanding its presence in the routing and switching sectors, it expects to maintain a trajectory of revenue growth and further gains in market share.

Ciena Shares Rise on Q4 Beat

Shares of Ciena (NYSE:CIEN) experienced a 2% increase intra-day today after the company reported fourth-quarter results that surpassed expectations, attributed to strong performance from cloud customers.

Ciena's revenue saw a 21% rise, reaching $1.13 billion and surpassing the anticipated $1.1 billion. The adjusted earnings per share (EPS) were $0.75, exceeding the expected $0.69 and showing an increase from $0.61 in the previous year.

Gary Smith, President and CEO of Ciena, remarked on the company's performance stating that the fiscal fourth quarter exhibited strong results, largely driven by increasing demand from cloud provider customers. This year, the company achieved a significant 21% growth in revenue, greatly expanding its market share and reinforcing its leadership position in the industry. As Ciena continues to pursue its strategy of enhancing its market leadership in optical solutions and expanding its presence in the routing and switching sectors, it expects to maintain a trajectory of revenue growth and further gains in market share.