Release Date: September 04, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ciena Corp (CIEN, Financial) reported strong fiscal third quarter results with revenue of $942 million and an adjusted gross margin of 43.7%.
- The company secured new wins with major cloud provider customers, driven by preparations for the expected growth in AI and cloud traffic.
- Ciena Corp (CIEN) achieved the world's first 1.6 terabit wavelength data transmission using its WaveLogic 6 Xtreme technology.
- The company's reconfigurable line system (RLS) is being deployed by all major cloud providers and a growing number of service providers.
- Ciena Corp (CIEN) ended the quarter with approximately $1.2 billion in cash and investments, and repurchased approximately 600,000 shares for $29 million during the quarter.
Negative Points
- Ciena Corp (CIEN) is experiencing challenges related to the timing and volume of service provider orders, particularly in North America and Europe.
- International service providers are showing cautious spending due to macroeconomic and geopolitical concerns, leading to a slower recovery in order volumes.
- The company's gross margins are impacted by the higher portion of line systems being sold, which have lower margins compared to other products.
- The broadband access business is facing short-term headwinds due to delays in public funding distribution.
- Ciena Corp (CIEN) is still working through elevated inventory levels, which are expected to remain above normal through fiscal year 2025.
Q & A Highlights
Highlights from Ciena Corp (CIEN) Q3 2024 Earnings Call
Q: Jim, just as you mentioned on the call, you had talked about kind of 6% to 8% kind of being a good long-term guide. Just as you look at fiscal '25 estimates as they are and they are within that range, is there a comfort that you have with kind of fiscal '25 estimates of the Street as they are?
A: We won't comment on the '25 estimates out there today. I will say that we feel great about our position in the market. We think 6% to 8% is a good long-term growth rate. It's going to vary from that in any given year as we've seen in the past. And I think we're going to continue to take share. So all of those things are good for us. But we don't want to make a comment about '25 at this point in time. We just finished Q3.
Q: And then maybe a second question for Gary. Just on the pluggables wins that you guys have had noting that you said that a lot of those were very short reach. Do you view the pluggables business that you're getting as additive to the business currently?
A: So Meta, on the second part of the question, the very short answer is yes. We view pluggables as an incremental TAM opportunity for Ciena. We've been most consistent about this. Most of that is going to go into the short reach where we really don't have much revenues at all right now. So that's basically it. We do not sit cannibalizing long-haul, submarine, where they're very complex and high-performance system requirements. We're not seeing that. On the metro DCI, which is less than 10% of the total optical market, by the way. We are seeing, again, incremental opportunities for us and any cannibalization would be really into the metro part of that DCI. We're not seeing that gather shape and any cannibalization will be there is more than major by the incremental pluggable opportunity in the short reach and by the overall growing marketplace.
Q: First of all, Jim, congratulations, and thank you for giving us a 1-year notice. Appreciate that. I hate being surprised. And we'll miss you. So on the questions, first of all, I wanted to see if you could put some dimensions around the MOFN opportunity you've talked about. Given that it's sort of buried in the telco, but it's somewhat indicative of cloud trends, that's my first question. As a follow-up, I wanted to see if you could comment on your broadband opportunities in light of announcement yesterday from one of your competitors winning exclusivity or at least claiming exclusivity with a Tier 1 US operator.
A: Simon, let me take the MOFN piece. It's increasingly becoming a larger part of our service provider piece in collaboration with the cloud providers around the globe, and it basically gives the cloud providers an opportunity to get to market quickly. Very often, they will define the architecture that they want delivered and they'll specify Ciena, and that's happening around the globe, particularly in places like India, which is obviously a large target market for the cloud providers. It's difficult to get visibility to all of those deals, but I would sort of put a size on it, probably 10% to 15% of our total service provider business is actually MOFN in some way shed for. That would be sort of best view of it, which, together with our direct cloud provider business and the Subsea business is getting us in that 40% to 50% of our total business really is cloud, both direct and sort of indirect. That's our best sort of perspective on it. And very often, in various countries, there will be a combination of different approaches by the cloud players. Some may be dark fiber, they like themselves. Some may be provision on just normal capacity and some will be on the dedicated MOFN deals, which we're increasingly seeing a lot of the cloud providers lean towards. And we are kind of uniquely placed around that given our global footprint in most of the major carriers around the world, our deep relationships with the cloud providers and particularly the highest market share of all of the submarine cable piece as well. So you put all of that together and we're somewhat uniquely positioned to address that market.
Q: Maybe for the first one, if I can sort of ask you more about the order commentary that you had in your prepared remarks. You mentioned the book-to-bill tracking above one, which I think would largely be seen as positive from sort of what your expectations for last quarter, but you also sort of highlighted the more sort of limited improvement or a slow recovery you're seeing with the service providers, particularly internationally. So I mean, can you just parse that out a bit in terms of the improvement orders between service providers and cloud and did sort of the service provider order improvement come in below your expectations. And I don't know if you ever provided like in terms of the service provide exposure do you have, how much is -- how much should we think is North America versus international? And I have a follow-up.
A: Clearly, our current order flows are driven mostly by the web scalers. But we do expect some improvement particularly on North American service providers in the near term, and we expect improvement in the international service providers next year. Just as a point of reference, our backlog grew to about $2.1 billion at the end of Q3. We think our order flow in Q4 will be at maybe slightly below our revenue cost. So our backlog, we expect at the end of this year will be $2 billion. We think that it will be a little heavier than it is today around service providers because we do expect some improvement in their order rates.
Q: And for my follow-up, we all sort of continue to see this robust investment or CapEx cycle from the web scalers and you talked about that being driven by your preparing for AI as well. How should we think about how much of that investment from the webscalers will be towards the pluggables or short reach versus really directed more towards your systems portfolio and sort of traditional portfolio that you have, how you're thinking about where does the AI preparedness benefit really come through on the portfolio side.
A: Yes. I think if you think about the pluggable piece, separate buying plugs to stick in other devices other than a whole end-to-end system, we've been pretty consistent with what we said that we think that, that is a place that plays in the short-reach metro DCI. And we also said that it would take longer for it to be a material piece of the industry or the business. And I think that's played out pretty accurately and we're starting to see that come through in terms of financial results for us as we ship 100 gig plugs into that application. And again, as Gary said, that is net incremental for us because we largely
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
